The multi-country transmission of sovereign and banking risk: a spatial vector autoregressive approach

Bing Zhu

Spatial Economic Analysis, 2018, vol. 13, issue 4, 422-441

Abstract: This paper develops a spatial vector autoregressive (SpVAR) model to investigate the transmission of sovereign, banking and corporate default risks among 11 Eurozone countries for the period January 2008–December 2013. The results show that a significant proportion of default risk variation is explained by foreign shocks. However, the cross-border sovereign–bank nexus is statistically significant, but economically moderate. Among the three sectors, shocks to the banking sector play the most critical role. On average, for the 11 countries, a foreign banking shock can explain 7%, 23% and 18% of the forecast error variance of changes in sovereign, banking and corporate credit default swap spreads respectively.

Date: 2018
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DOI: 10.1080/17421772.2018.1473890

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