Sovereign Bond Market Spillovers from Crisis-Time Developments in Greece

78 Pages Posted: 3 Aug 2020

See all articles by Daragh Clancy

Daragh Clancy

European Stability Mechanism

Carmine Gabriele

European Stability Mechanism

Diana Zigraiova

Charles University in Prague

Date Written: June 11, 2020

Abstract

The systemic importance of a country is a crucial component in the European Stability Mechanism's assessment of financial assistance requests. However, disentangling the effect of developments in one country on other countries in real time is fraught with difficulties. Using empirical methods that provide ex-ante measures of risk exposure, we find that changes in the tail risks of Greek sovereign bond returns resulted in immediate and significant cross-market spillovers to other euro area sovereign bond returns. Our approach provides real-time insights on evolving cross-market interdependencies, such as Germany gradually becoming a safe haven from Greece. We confirm that developments in Greece drive our tail-risk results by linking them to a newly developed intra-day event database. This approach also allows us to provide a more intuitive quantification of the spillovers emanating from Greece. Taken together, our findings demonstrate that developments in Greece significantly affected other euro area sovereign bond markets over and beyond global, euro area and country-specific factors. Our results provide evidence for the systemic importance of Greece throughout the European sovereign debt crisis.

Keywords: crisis, events, narrative, sovereign bonds, spillovers, tail risks

JEL Classification: C22; G01; G15; F36

Suggested Citation

Clancy, Daragh and Gabriele, Carmine and Zigraiova, Diana, Sovereign Bond Market Spillovers from Crisis-Time Developments in Greece (June 11, 2020). European Stability Mechanism Working Paper No. 45, Available at SSRN: https://ssrn.com/abstract=3666217 or http://dx.doi.org/10.2139/ssrn.3666217

Daragh Clancy (Contact Author)

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
L-1347
Luxembourg

Carmine Gabriele

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
L-1347
Luxembourg

Diana Zigraiova

Charles University in Prague ( email )

Celetná 13
Praha 1, 116 36
Czech Republic

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