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Sovereign-bank linkages: Quantifying directional intensity of risk transfers in EMU countries

Manish Singh (), Marta Gómez-Puig and Simon Sosvilla-Rivero

Journal of International Money and Finance, 2016, vol. 63, issue C, 137-164

Abstract: This study attempts to identify and trace inter-linkages between sovereign and banking risk for each main country in the euro area. To this end, we use an indicator of banking sector risk in each country based on the Contingent Claim Analysis literature, and 10-year government yield spreads over Germany as a measure of sovereign risk. We apply a dynamic approach to test for Granger causality between the two measures of risk in each country, allowing us to check for episodes of significant and abrupt increase in short-run causal linkages. The empirical results indicate that episodes of causality intensification vary considerably in both directions over time and across the different EMU countries. The directionality suggests the presence of causality intensification, mainly from banks to sovereigns in crisis periods.

Keywords: Sovereign debt crisis; Banking crisis; Distance-to-default; Granger causality; Time-varying approach (search for similar items in EconPapers)
JEL-codes: C22 E44 G01 G13 G21 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (22)

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DOI: 10.1016/j.jimonfin.2016.01.003

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