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Intraday Dynamics of Euro Area Sovereign Credit Risk Contagion

Lubos Komarek (), Kristyna Ters and Jorg Urban

Working Papers from Czech National Bank, Research Department

Abstract: We examine the role of the CDS and bond markets during and before the recent euro area sovereign debt crisis as transmission channels for credit risk contagion between sovereign entities. We analyse an intraday dataset for GIIPS countries as well as Germany, France and central European countries. Our findings suggest that, prior to the crisis, the CDS and bond markets were similarly important in the transmission of financial shock contagion, but that the importance of the bond market waned during the crisis. We find flight-to-safety effects during the crisis in the German bond market that are not present in the pre-crisis sample. Our estimated sovereign risk contagion was greater during the crisis, with an average timeline of one to two hours in GIIPS countries. By using an exogenous macroeconomic news shock, we can show that, during the crisis period, increased credit risk was not related to economic fundamentals. Further, we find that central European countries were not affected by sovereign credit risk contagion, independent of their debt level and currency.

Keywords: Contagion; credit default swaps; panel VAR; sovereign credit risk; sovereign debt crisis; spillover (search for similar items in EconPapers)
JEL-codes: E44 G12 G14 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-fmk and nep-mac
Date: 2016-06
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Working Paper: Intraday dynamics of euro area sovereign credit risk contagion (2016) Downloads
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