An anatomy of credit risk transfer between sovereign and financials in the Eurozone Crisis

Banerjee, A., Hung, C.-H. D. and Lo, K. L. (2016) An anatomy of credit risk transfer between sovereign and financials in the Eurozone Crisis. Journal of International Financial Markets, Institutions and Money, 41, pp. 102-120. (doi: 10.1016/j.intfin.2015.12.007)

Abstract

In this paper we assess the effectiveness of large scale bailouts aiming at preventing a financial crisis from further propagating into a systemic risk. We examine the structural changes in the relationship between the sovereign and financial institutions’ credit default swap spreads during the European sovereign debt crisis. Before the first Greek bailout by the European Financial Stability Facility (EFSF), the sovereign and financial sectors exhibit a two-way feedback effect for both the short and the long runs. Crucially, we find that after the first Greek bailout, shocks in the financial sector either exert significantly negative impacts or lose influences on the sovereign sector. In contrast, all the later bailouts by the EFSF (the second Greek bailout, Irish and Portugal bailouts) do not show this pattern change in the two-way risk transfer relationship.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Hung, Dr Daniel
• Authors: Banerjee, A., Hung, C.-H. D., and Lo, K. L.
• College/School: College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Journal Name: Journal of International Financial Markets, Institutions and Money
• Publisher: Elsevier
• ISSN: 1042-4431
• ISSN (Online): 1873-0612
• Copyright Holders: Copyright © 2016 Elsevier Ltd.
• First Published: First published in Journal of International Financial Markets, Institutions and Money 2016
• Publisher Policy: Reproduced in accordance with the copyright policy of the publisher