The sovereign-bank nexus in peripheral euro area: Further evidence from contingent claims analysis



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Gómez-Puig, Marta and Singh, Manish K. and Sosvilla-Rivero, Simón (2019) The sovereign-bank nexus in peripheral euro area: Further evidence from contingent claims analysis. North American Journal of Economics and Finance, 49 . pp. 1-26. ISSN 1062-9408

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New evidence is presented on the nexus between the sovereign and banking sector risk. Applying the contingent claims methodology to the peripheral euro area countries over the 2004Q4-2013Q2 period, we build indicators of sovereign and bank risk and assess their interconnection in comparison with existing market-based indicators of bank and sovereign distress. We use three different statistical measures of interdependence based on principal components analysis, Granger causality framework and Diebold-Yilmaz’s connectedness index. The empirical results show strong interconnection and co-movement between country-level banking and sovereign risk indicators. We also find evidence of bi-directional bank-sovereign causal linkages only for Spain during the European sovereign debt crisis period. For the late crisis period, we detect weak interrelationship and more divergence across the various risk indicators. Our findings indicate that secondary and derivatives market indices are more driven by common underlying factors than are contingent claim based risk measures. Finally, our results also suggest that market participants risk appetite was the main channel of risk transmission between sovereigns and banks for the countries under study during the sample period.

Item Type:Article
Uncontrolled Keywords:Sovereign risk; Bank risk; Sovereign-bank nexus; Contingent claims
Subjects:Social sciences > Economics > Banks and credit unions
Social sciences > Economics > Public economy
Social sciences > Economics > Finance
JEL:G13, G21, G33, H63
ID Code:60139
Deposited On:23 Apr 2020 12:02
Last Modified:08 Apr 2021 08:40

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