The Impact of Unconventional Monetary Policy on the Sovereign Bank Nexus within and Across EU Countries. A Time-Varying Conditional Correlation Analysis
35 Pages Posted: 20 Jun 2016 Last revised: 23 Jun 2016
Date Written: June 20, 2016
We investigate the time varying dynamics of the linkages between sovereign and bank default risks over the period 2006-2015, using the credit default swap (CDS) spreads of the bonds of major international banks and of sovereign issuers as indicators of risk within four major European countries. The nexus between bank risk in core countries and sovereign risk of peripheral countries is also analyzed, under the hypothesis that higher bond yields and preferential treatment of bond issued by euro sovereigns under Basle II may have favored the stocking of peripheral sovereign bonds in core bank portfolios. The use of a time-varying regime switching correlation analysis, the STCC-GARCH, allows to identify the economic variable behind the state shifts, the so-called “transition variable”, and to date precisely the changes in the size of the correlations that are due to shocks (viz. the Lehman crisis, the evolution of the Greek crisis) or to unconventional monetary policies such as Quantitative Easing and TLTRO.
Keywords: CDS spreads, Unconventional monetary policy, STCC-GARCH correlation analysis
JEL Classification: E43, E52, F36, C32
Suggested Citation: Suggested Citation