Policy uncertainty, interest rate environment and the dynamic correlation between sovereign and bank default risk

Stephan Bales and Hans-Peter Burghof

Economics Letters, 2021, vol. 206, issue C

Abstract: This study assesses the impact of policy uncertainty and the interest rate environment on the sovereign-bank nexus considering 48 banks in 14 countries. By applying principal component analysis to bank CDS premia in a country, the dynamic conditional correlation between sovereign CDS premia and the common variation underlying bank CDS is specified. Fixed effects panel regression analysis shows that the sovereign-bank correlation significantly increases in times of great policy uncertainty, low bank interest margins, high interbank market rates, and a low ratio of bank Tier 1 capital.

Keywords: Sovereign-bank nexus; Economic policy uncertainty; Interest rates; DCC-GARCH (search for similar items in EconPapers)
JEL-codes: E40 E44 E58 G21 G28 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:206:y:2021:i:c:s0165176521002603

DOI: 10.1016/j.econlet.2021.109983

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