How Important Was Contagion Through Banks During the European Sovereign Crisis?

Andrea Beltratti and René Stulz
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Andrea Beltratti: Bocconi University

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: We use days with tail sovereign CDS spread changes of peripheral countries to identify the effects of shocks to the cost of borrowing of these countries on stock returns of banks from other countries. We find that tail sovereign GIIPS CDS changes have an asymmetric impact in that bank stocks benefit more from negative CDS spread shocks than they are hurt by positive shocks, which creates moral hazard and is best explained by a "too-systemic-to-fail" effect. The contagion effects are stronger for more pervasive shocks, so that idiosyncratic shocks to small countries, such as Greece, do not have an economically significant impact, but shocks involving large GIIPS countries or multiple GIIPS countries have such an impact. In our benchmark specification, holdings of peripheral country bonds by banks from other countries do not constitute a statistically or economically significant contagion channel for tail spread increases.

JEL-codes: F34 G12 G15 G21 H63 (search for similar items in EconPapers)
Date: 2017-06
New Economics Papers: this item is included in nep-ban
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2017-15

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