Dynamic connectedness between credit and liquidity risks in euro area sovereign debt markets

Marta Gómez-Puig, Mary Pieterse-Bloem and Simon Sosvilla-Rivero

Journal of Multinational Financial Management, 2023, vol. 68, issue C

Abstract: We examine the dynamic interconnections between sovereign credit and liquidity risks in ten euro area countries at the 5-year maturity with daily CDS data from IHS Markit and high-frequency data from MTS between 2008 and 2018 using the extended TVP-VAR connectedness approach of Antonakakis et al. (2020). We find that, for most of the period, net connectedness is from credit risk to liquidity risk, but this indicator is time-dependent, detecting some episodes where it goes from liquidity risk to credit risk. We set up an event study and discover that most of the latter episodes can be related to several unconventional monetary policy measures of the ECB. Then, we examine the drivers of the connectedness indicator using a Probit model. Our results suggest that a decline in global funding liquidity, monetary policy shocks and economic policy uncertainty increase the probability of risk transmission from liquidity to credit, while tensions in financial markets and the deterioration of fiscal sustainability are factors that reduce such a probability.

Keywords: Liquidity risk; Credit risk; Eurozone sovereign bonds; MTS bond market; Dynamic connectedness; Time-varying parameters (search for similar items in EconPapers)
JEL-codes: C22 C53 G12 G14 G15 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:mulfin:v:68:y:2023:i:c:s1042444x23000191

DOI: 10.1016/j.mulfin.2023.100800

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