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Euro area sovereign risk spillovers before and after the ECB's OMT announcement

Niels Gilbert

DNB Working Papers from Netherlands Central Bank, Research Department

Abstract: We study the dynamics of sovereign risk spillovers from (and between) Spain and Italy, before and after the ECB's announcement of the OMT program. We identify domestic Italian and Spanish sovereign risk shocks through an intraday event study. The shocks are used as external instruments in bilateral, daily, local projection regressions. Prior to the announcement of the OMT, changes in the Spanish and, to a lesser extent, Italian spread spilled over to many other euro area member states, and also affected the euro-dollar exchange rate. Peak effects generally materialized after 2-3 days. Since the OMT announcement, spillovers to non-crisis, non-safe haven countries have disappeared. Some spillovers among crisis countries persist, but are smaller and shorter-lived than before. Overall, our results are consistent with the view that the OMT, through eliminating equilibrium multiplicity, has largely stopped contagion.

Keywords: Sovereign risk; contagion; narrative identification; local projections; OMT (search for similar items in EconPapers)
JEL-codes: C53 E44 F36 G01 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-fmk and nep-mac
Date: 2019-05
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Persistent link: https://EconPapers.repec.org/RePEc:dnb:dnbwpp:636

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