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The diabolical sovereigns/banks risk loop: A VAR quantile design

Matteo Foglia and Eliana Angelini

The Journal of Economic Asymmetries, 2020, vol. 21, issue C

Abstract: This article focuses on the tail risk spillover (co-movement) effect between the sovereign and banking sector in the eurozone, using a novel multivariate quantile model (VAR for VaR method) and then the relative pseudo quantile impulse response functions. We analysed the causality risk transmission at different quantiles (up/downside), using daily credit default swap from 9 October 2008 to 29 May 2018. Our main findings confirm the two-way causality between these credit markets, highlight the presence of an asymmetry in the mechanisms of shock transmissions between core and no core bank/sovereign, respectively. Also, we measure the directional predictability in the quantiles using the cross-quantilogram approach. The results suggest that a high credit risk sovereign predicts high sovereign risk (and vice versa).

Keywords: Credit default spread; Two-way feedback; Risk spillover; VAR for VaR; Cross-quantilogram; Sovereign-bank nexus (search for similar items in EconPapers)
JEL-codes: C14 E44 G01 G20 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.jeca.2020.e00158

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