What’s Mine Is Yours: Sovereign Risk Transmission during the European Debt Crisis

Matthew Greenwood-Nimmo, Viet Hoang Nguyen and Yongcheol Shin

Melbourne Institute Working Paper Series from Melbourne Institute of Applied Economic and Social Research, The University of Melbourne

Abstract: We develop an empirical network model to study bilateral sovereign credit risk spillovers during the European debt crisis. We show that the spillover density is typically asymmetric with heavy tails. This confounds efforts to track time-variation in spillover activity using the mean-based summary statistics that are widespread in the literature. Density-based measures — specifically divergence criteria — yield stronger and timelier signals of changes in spillover activity than mean-based measures. This is particularly apparent for sovereign bailouts, which principally affect the tails of the spillover density. Consequently, densitybased measures provide valuable additional information about changes in the credit risk environment.

Keywords: Sovereign credit risk; credit default swaps (CDS); network models and connectedness; spillover density; divergence criteria (search for similar items in EconPapers)
JEL-codes: C58 F45 G15 H63 (search for similar items in EconPapers)
Pages: 45pp
Date: 2017-07
New Economics Papers: this item is included in nep-eec and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:iae:iaewps:wp2017n17

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