A Revisit to Sovereign Risk Contagion in Eurozone with Mutual Exciting Regime-Switching Model

Shuyi Ge

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: This paper proposes a new mutual exciting regime-switching model where crises can spread contagiously across countries. Each country has its own hidden stochastic process that determines whether the country is in a normal or crisis regime. Contagion is defined as a rise in the transition probability to the crisis regime when other countries are in crisis in the past state. Using this new approach, I revisit the sovereign risk contagion in the euro area. I find that there are striking shifts in market pricing functions for the sovereign bond spreads. Multi-country contagion plays a dominant role in driving such shifts, while common risk factors and country-specific fundamentals are much less important.

Keywords: Contagion; Inter-dependence; Regime-switching; Mutual excitation; Sovereign credit risk (search for similar items in EconPapers)
JEL-codes: C10 C58 F36 G12 G15 (search for similar items in EconPapers)
Date: 2020-11-26
New Economics Papers: this item is included in nep-eec and nep-ore
Note: sg751
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:20114

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