A revisit to sovereign risk contagion in eurozone with mutual exciting regime-switching model

Shuyi Ge

Journal of Economic Dynamics and Control, 2023, vol. 146, issue C

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 it is in a normal or crisis regime. The mutual-excitation component allows interactions in the Markov chains, and a crisis in one country could increase the likelihood of a crisis in another country. Using this new approach, I revisit the sovereign risk contagion in the euro area. I find 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 less important.

Keywords: Contagion; Inter-dependence; Regime-switching; Mutual excitation; Sovereign credit risk (search for similar items in EconPapers)
JEL-codes: C24 C58 F36 G12 G15 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:146:y:2023:i:c:s0165188922002688

DOI: 10.1016/j.jedc.2022.104565

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