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Sovereigns and banks in the euro area: A tale of two crises

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Gómez-Puig, Marta and Sosvilla-Rivero, Simón and Singh, Manish K. (2015) Sovereigns and banks in the euro area: A tale of two crises. [ Working Papers on International Economics and Finance; nº 15-01, ISSN: 1696-6376 ]

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Abstract

This study attempts to identify and trace inter-linkages between sovereign and banking risk in the euro area. To this end, we use an indicator of banking risk in each country based on the Contingent Claim Analysis literature, and 10-year government yield spreads over Germany as a measure of sovereign risk. We apply a dynamic approach to testing for Granger causality between the two measures of risk in 10 euro area countries, allowing us to check for contagion in the form of a significant and abrupt increase in short-run causal linkages. The empirical results indicate that episodes of contagion vary considerably in both directions over time and within the different EMU countries. Significantly, we find that causal linkages tend to strengthen particularly at the time of major financial crises. The empirical evidence suggests the presence of contagion, mainly from banks to sovereigns.


Item Type:Working Paper or Technical Report
Uncontrolled Keywords:Sovereign debt crisis; Banking crisis; Granger-causality; Time-varying approach; Distance-to-default; Euro area
Subjects:Social sciences > Economics > Banks and credit unions
Social sciences > Economics > Depressions
Social sciences > Economics > Econometrics
Social sciences > Economics > World economy
Social sciences > Economics > Public economy
Social sciences > Economics > Finance
Social sciences > Economics > Economic integration
JEL:C22, E44, G01, G13, G21
Series Name:Working Papers on International Economics and Finance
Volume:
Number:15-01
ID Code:30626
Deposited On:02 Jul 2015 08:55
Last Modified:19 Dec 2018 09:59

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