Effectiveness of Policy and Regulation in European Sovereign Credit Risk Markets: A Network Analysis

46 Pages Posted: 5 Nov 2020

See all articles by Rebekka Buse

Rebekka Buse

Karlsruhe Institute of Technology

Melanie Schienle

Karlsruhe Institute of Technology (KIT)

Joerg Urban

University of Basel

Date Written: March, 2019

Abstract

We study the impact of changes in regulations and policy interventions on systemic risk among European sovereign entities measured as volatility spillovers in respective credit risk markets. Our unique intraday CDS dataset allows for precise measurement of the effectiveness of these events in a network setting. In particular, it allows discerning interventions which entail significant changes in network cross-effects with appropriate bootstrap confidence intervals. We show that it was mainly regulatory changes with the ban of trading naked sovereign CDS in 2012 as well as the new ISDA regulations in 2014 which were most effective in reducing systemic risk. In comparison, we find that the effect of policy interventions was minor and generally not sustainable. In particular, they only had a significant impact when implemented for the first time and when targeting more than one country. For the volatility spillover channels, we generally find balanced networks with no fragmentation over time.

Keywords: bootstrap spillover-measures, financial crises, financial stability and systemic risk in the eurozone, high-frequency cds, policy and regulation

JEL Classification: G20, G01, G17, C32, C55, G28

Suggested Citation

Buse, Rebekka and Schienle, Melanie and Urban, Joerg, Effectiveness of Policy and Regulation in European Sovereign Credit Risk Markets: A Network Analysis (March, 2019). ESRB: Working Paper Series No. 2019/90, Available at SSRN: https://ssrn.com/abstract=3723446 or http://dx.doi.org/10.2139/ssrn.3723446

Rebekka Buse (Contact Author)

Karlsruhe Institute of Technology ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

Melanie Schienle

Karlsruhe Institute of Technology (KIT) ( email )

Institute of Economics (ECON)
Karlsruhe
Germany

Joerg Urban

University of Basel ( email )

Petersplatz 1
Basel, CH-4003
Switzerland

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