What's Mine Is Yours: Sovereign Risk Transmission during the European Debt Crisis
45 Pages Posted: 14 Jul 2017
Date Written: July 14, 2017
We develop an empirical network model to study bilateral sovereign credit risk spillovers during the European debt crisis. We show that the spillover density is typically asymmetric with heavy tails. This confounds efforts to track time-variation in spillover activity using the mean-based summary statistics that are widespread in the literature. Density-based measures — specifically divergence criteria — yield stronger and timelier signals of changes in spillover activity than mean-based measures. This is particularly apparent for sovereign bailouts, which principally affect the tails of the spillover density. Consequently, density-based measures provide valuable additional information about changes in the credit risk environment.
Keywords: Sovereign Credit Risk, Credit Default Swaps (CDS), Network Models and Connectedness, Spillover Density, Divergence Criteria
JEL Classification: C58, F45, G15, H63
Suggested Citation: Suggested Citation