What's Mine Is Yours: Sovereign Risk Transmission during the European Debt Crisis

45 Pages Posted: 14 Jul 2017  

Matthew Greenwood-Nimmo

The University of Melbourne; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Viet Hoang Nguyen

Melbourne Institute of Applied Economic and Social Research

Yongcheol Shin

Independent

Date Written: July 14, 2017

Abstract

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

Greenwood-Nimmo, Matthew and Nguyen, Viet Hoang and Shin, Yongcheol, What's Mine Is Yours: Sovereign Risk Transmission during the European Debt Crisis (July 14, 2017). Melbourne Institute Working Paper No. 17/17. Available at SSRN: https://ssrn.com/abstract=3002280 or http://dx.doi.org/10.2139/ssrn.3002280

Matthew Greenwood-Nimmo (Contact Author)

The University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

Viet Hoang Nguyen

Melbourne Institute of Applied Economic and Social Research ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

Yongcheol Shin

Independent

No Address Available

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