Bank/Sovereign Risk Spillovers in the European Debt Crisis

Bruyckere, Valerie De; Gerhardt, Maria; Schepens, Glenn; Vennet, Rudi Vander

doi:10.2139/ssrn.2163541

Cited by 111 publications

(109 citation statements)

References 28 publications

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“…Studies examining spillovers across sovereign CDS include those by Beirne & Fratzscher (2013), Caporin et al (2013), Aït-Sahalia, Laeven & Pelizzon (2014), Benzoni et al (2015), and Brutti & Sauré (2015). Studies concerned with spillovers between sovereign and financial CDS include those by Bruyckere et al (2013) and Alter & Beyer (2014).…”

Section: Determinants Of Sovereign Credit Riskmentioning

confidence: 99%

Credit Default Swaps: Past, Present, and Future

Augustin

Subrahmanyam

Tang

et al. 2016

Annu. Rev. Financ. Econ.

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Credit default swaps (CDS) have grown to be a multi-trillion-dollar, globally important market. The academic literature on CDS has developed in parallel with the market practices, public debates, and regulatory initiatives in this market. We selectively review the extant literature, identify remaining gaps, and suggest directions for future research. We present a narrative including the following four aspects. First, we discuss the benefits and costs of CDS, emphasizing the need for more research in order to better understand the welfare implications. Second, we provide an overview of the postcrisis market structure and the new regulatory framework for CDS. Third, we place CDS in the intersection of law and finance, focusing on agency conflicts and financial intermediation. Last, we examine the role of CDS in international finance, especially during and after the recent sovereign credit crises. 10.1

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Section: Determinants Of Sovereign Credit Riskmentioning

confidence: 99%

Credit Default Swaps: Past, Present, and Future

Augustin

Subrahmanyam

Tang

et al. 2016

Annu. Rev. Financ. Econ.

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“…Bruyckere et al (2013) study contagion/spillovers between sovereign and bank risk for 15 countries and more than 50 banks through the lens of excess correlations, defined as the correlation in residual CDS spreads after having removed the influence of country-specific and global risk factors. About 86% of all banks in their sample have statistically significant excess correlations, and the average excess correlation is 17%.…”

Section: Spillovers Between Sovereign and Financial Cdsmentioning

confidence: 99%

Credit Default Swaps: A Survey

et al. 2014

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Credit default swaps (CDS) have been growing in importance in the global financial markets. However, their role has been hotly debated, in industry and academia, particularly after the credit crisis of 2008-2009 and the European sovereign crisis of 2010-2012. We review the extant literature on CDS that has accumulated over the past two decades. We divide our survey into seven topics after providing a broad overview in the introduction. The second section traces the historical development of CDS markets and provides an introduction to CDS contract definitions and conventions. The third section discusses the pricing of CDS, from the perspective of no-arbitrage principles as well as from that of structural and reduced-form credit risk models. It also summarizes the literature on the determinants of CDS spreads, with a focus on the role of fundamental credit risk factors, liquidity and counterparty risk. The fourth section discusses how the development of the CDS market has affected the characteristics of the related bond and equity markets, with an emphasis on the closely related concepts of market efficiency, price discovery, information flow and liquidity. Attention is also paid to the CDS-bond basis, the wedge between the pricing of the CDS and its reference bond, and the mispricing between the CDS and the equity market, which leads to a discussion on capital structure arbitrage. The fifth section examines the effect of CDS trading on firms' credit and bankruptcy risk, and how it affects corporate financial policy, including bond issuance, capital structure, liquidity management, and both external and internal corporate governance. The sixth section summarizes the literature that takes into account how CDS may impact the incentives of the various agents in the economy and the associated impact on the pricing of the contracts. In particular, we examine how CDS may alter the debtor-creditor relationship. Section seven reviews the growing literature on sovereign CDS and highlights the major conceptual and contractual differences between the sovereign and corporate CDS markets. In section eight, we discuss CDS indices, especially the role of synthetic CDS index products backed by residential mortgage-backed securities during the financial crisis. We close with our suggestions for promising future research directions on CDS contracts and markets.

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“…This can happen via different channels (see BIS, 2011;Prisker, 2001;De Bruyckere, Gerhardt, Schepens, & Vennet, 2013). They occur not only between sovereigns and between banks but also between sovereigns and banks.…”

Section: Introductionmentioning

confidence: 99%

“…They occur not only between sovereigns and between banks but also between sovereigns and banks. De Bruyckere et al (2013) define contagion as excess correlation and find empirical evidence for contagion between banks and sovereigns in 2012. Using the canonical model of contagion by Pesaran and Pick (2007), Metiu (2013) finds evidence for contagion in EMU bond yields.…”

Section: Introductionmentioning

confidence: 99%

Spillover effects of credit default risk in the euro area and the effects on the Euro: A GVAR approach

Bettendorf

2018

Int. J Fin Econ

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During the 2008 financial crisis, increasing risk and spillovers became a main concern for policy makers and banks. In addition, changes in sovereign and bank risk are believed to have had strong effects on world‐wide exchange rates. This paper aims to analyse these dynamics empirically. We estimate a Global VAR (GVAR) model for nine EMU countries plus Japan, the United Kingdom, and the United States and identify structural risk shocks using sign restrictions. Our results indicate that spillover effects of general risk are much stronger than those of bailouts. Furthermore, we demonstrate that the Euro depreciates significantly against the Yen and U.S. dollar following general risk shocks in the euro area and only to a small extent following bailout shocks. The Pound Sterling is not affected by any of these shocks. The Euro variability is, from the EMU perspective, mainly driven by shocks stemming from large countries (e.g., Germany, France, and Italy). However, shocks from third countries also play an important role.

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Bank/Sovereign Risk Spillovers in the European Debt Crisis

Cited by 111 publications

References 28 publications

Credit Default Swaps: Past, Present, and Future

Credit Default Swaps: Past, Present, and Future

Credit Default Swaps: A Survey

Spillover effects of credit default risk in the euro area and the effects on the Euro: A GVAR approach

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