Sovereign – Bank Risk Interconnections During the Greek Financial Crisis and the Role of the Italian Debt

DISEI - Università degli Studi di Firenze Working Paper N. 01/2018

28 Pages Posted: 23 Jan 2018

See all articles by Giulio Cifarelli

Giulio Cifarelli

DISEI University of Florence

Giovanna Paladino

IntesaSanpaolo; LUISS Economics Department

Date Written: January 15, 2018

Abstract

The Greek crisis has brought to light the strong nexus between the credit risks of European banks and their sovereign. We study this phenomenon in Germany, France, Italy and Spain by estimating the conditional correlations between sovereign and bank CDS bond spreads over the period 2006-2015. A trivariate time-varying regime switching correlation analysis, the STCC-GARCH, is implemented to associate the state shifts to the dynamics of the so-called “transition variable”. We start selecting as transition variable the first difference of the spread between Greek and German sovereign bond yields. We then expand the model – via a DSTCC-GARCH parameterization – and introduce a second transition variable, representing the influence of the Italian sovereign debt. There is a clear evidence of significant changes in the correlations structure due to the evolution of the Greek crisis and to the sustainability of the Italian debt, which in turns impinges on the tenability of the euro project. The role of Italy on the nexuses of France and Germany increases after 2011.

Keywords: CDS Spreads, Greek Financial Crisis, STCC- and DSTCC-GARCH Correlation Analysis, Contagion

JEL Classification: E43, E52, F36, C32

Suggested Citation

Cifarelli, Giulio and Paladino, Giovanna, Sovereign – Bank Risk Interconnections During the Greek Financial Crisis and the Role of the Italian Debt (January 15, 2018). DISEI - Università degli Studi di Firenze Working Paper N. 01/2018. Available at SSRN: https://ssrn.com/abstract=3102482 or http://dx.doi.org/10.2139/ssrn.3102482

Giulio Cifarelli

DISEI University of Florence ( email )

via delle Pandette 9
Florence 50127
Italy

Giovanna Paladino (Contact Author)

IntesaSanpaolo ( email )

Piazza San Carlo
Torino, 10121
Italy

LUISS Economics Department ( email )

Viale di Villa Massimo, 57
Rome, 00161
Italy

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