Banks and Sovereigns: Did Adversity Bring Them Closer?

39 Pages Posted: 17 Jun 2020

See all articles by Mardi H. Dungey

Mardi H. Dungey

University of Tasmania (deceased); Financial Research Network (FIRN) (deceased)

Thomas Flavin

National University of Ireland, Maynooth (Maynooth University) - Department of Economics, Finance and Accounting

Lisa Sheenan

Queen's University Belfast - Queen's Management School

Date Written: June 15, 2020

Abstract

We analyse the stability of the cross-market shock transmission mechanism between banks and sovereign bonds during the Eurozone sovereign debt crisis for crisis-hit periphery countries and Germany. We also examine the shock propagation of banking shocks and sovereign bond shocks between domestic and external markets. Using a Markov-switching framework, we find strong evidence of bilateral contagion between banks and sovereign bonds and also between domestic and external banking sectors. Sovereign bond markets are different. An external shock only produces contagious effects in Greece, who were largely dependent on external aid. For all the others, external shocks lead to decoupling as investors became increasingly discerning in their perception of the debt instruments issued by different Eurozone states.

Keywords: Sovereign bonds, Debt crisis, Banking crisis, Eurozone, Markov-switching VAR

JEL Classification: G01, G10, G21

Suggested Citation

Dungey, Mardi H. and Flavin, Thomas J and Sheenan, Lisa, Banks and Sovereigns: Did Adversity Bring Them Closer? (June 15, 2020). QMS Research Paper 2020/05, Available at SSRN: https://ssrn.com/abstract=3627639 or http://dx.doi.org/10.2139/ssrn.3627639

Mardi H. Dungey

University of Tasmania (deceased)

Financial Research Network (FIRN) (deceased)

Thomas J Flavin

National University of Ireland, Maynooth (Maynooth University) - Department of Economics, Finance and Accounting ( email )

County Kildare
Ireland
+353 1 708 3369 (Phone)
+353 1 708 3934 (Fax)

Lisa Sheenan (Contact Author)

Queen's University Belfast - Queen's Management School ( email )

Riddel Hall
185 Stranmillis Road
Belfast, BT9 5EE
United Kingdom

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