The Transmission of Euro Area Sovereign Risk Contagion: Evidence from Intraday CDS and Bond Markets
38 Pages Posted: 8 Nov 2016
Date Written: September 8, 2016
We examine the role of the CDS and bond markets during and before the recent euro area sovereign debt crisis as transmission channels for credit risk contagion between sovereign entities. We analyse an intraday dataset for GIIPS countries as well as for France and Germany. Our findings suggest that, prior to the crisis, the CDS and bond markets were similarly important in the transmission of sovereign risk contagion, but that the importance of the bond market waned during the crisis. We find flight-to-safety effects during the crisis period in the German bond market. By using an exogenous macroeconomic news shock, we can show that, during the crisis period, sovereign credit risk was not related to economic fundamentals but rather driven by the announcements of the economic adjustment programmes (EAP) as the magnitude of risk contagion spreading from the country under the EAP did strongly decrease following these announcements. Only after the enlargement of the European Financial Stability Facility in July 2011, we find a strong decrease of interlinkages and a stabilising effect on the joint credit risk contagion across all GIIPS countries.
Keywords: Contagion, Credit Default Swaps, Intraday, Panel VAR, Sovereign Credit Risk, Sovereign Debt Crisis, Spillover
JEL Classification: E44, G12, G14, G15
Suggested Citation: Suggested Citation