Sovereign - bank risk interconnections during the Greek financial crisis and the role of the Italian debt

Giulio Cifarelli () and Giovanna Paladino

Working Papers - Economics from Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa

Abstract: The Greek crisis has brought to light the strong nexus between the credit risks of European banks and their sovereign. We study this phenomenon in Germany, France, Italy and Spain by estimating the conditional correlations between sovereign and bank CDS bond spreads over the period 2006-2015. A trivariate time-varying regime switching correlation analysis, the STCC-GARCH, is implemented to associate the state shifts to the dynamics of the so-called “transition variable†. We start selecting as transition variable the first difference of the spread between Greek and German sovereign bond yields. We then expand the model – via a DSTCC-GARCH parameterization - and introduce a second transition variable, representing the influence of the Italian sovereign debt. There is a clear evidence of significant changes in the correlations structure due to the evolution of the Greek crisis and to the sustainability of the Italian debt, which in turns impinges on the tenability of the euro project. The role of Italy on the nexuses of France and Germany increases after 2011.

Keywords: CDS spreads; Greek financial crisis; STCC- and DSTCC-GARCH correlation analysis; contagion (search for similar items in EconPapers)
JEL-codes: C32 E43 E52 F36 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2018
New Economics Papers: this item is included in nep-ban, nep-eec and nep-mac
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