Credit Risk in the Euro Area

Gilchrist, Simon; Mojon, Benoı̂t

doi:10.1111/ecoj.12427

Cited by 152 publications

(151 citation statements)

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“…Next, they use this index to predict future real economic variables such as industrial production and U.S. non-farm payroll employment, and find a high marginal predictive power of the credit spread index. Gilchrist and Mojon (2014) report similar results for several countries in the euro area. In addition, Faust et al (2013) who forecast real-time economic activities using a Bayesian model-averaging (BMA) approach, conclude that compared with an autoregressive benchmark the predictive content of the BMA approach is significantly better and that this is mostly due to the inclusion of credit spreads.…”

Section: Literature Reviewsupporting

confidence: 64%

The time-varying relationship between credit spreads and employment growth

Haan

2018

Applied Economics

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After the global financial crisis, several central banks introduced unconventional monetary policies, such as quantitative easing (QE). If QE increases asset prices, but does not boost the real economy to the same extent, the relationship between credit spreads and employment growth will weaken. This study investigates this issue for the U.S. in a moving-windows framework. Our results suggest that the link between credit spreads and employment growth is lower during bubbles and recessions. We also find that the relationship weakened after the Fed introduced QE.

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Section: Literature Reviewsupporting

confidence: 64%

The time-varying relationship between credit spreads and employment growth

Haan

2018

Applied Economics

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“…Bai and Collin-Dufresne examine the cross-sectional determinants of the price difference between the two contracts and explain that the more the counterparty risk component, the risk premium and the collateral margin of the bond are important, the more the difference measure is large. More lately, Gilchrist and Mojon (2016) investigate credit risk measures of financial and non-financial Euro companies and find that the Global Financial crisis has negatively impacted the borrowing cost reflected in the bond spread of these firms, while the US doc-com bubble of 2000s has only impacted the non-financial corporations. Authors find, as well, that the financial crisis has widened the cross-countries price difference between the CDS and the bond spreads due to national and not euro area credit conditions.…”

Section: The Determinants Of the Price Divergencementioning

confidence: 99%

“…Longstaff et al (2005) and Ismailescu and Phillips (2015) promote the use of the US treasury yield when it comes to studying an extensive dataset of European and American corporate bonds while other authors are more flexible and use yields of bonds issued by the lowest risky government in the area. For instance, to construct bond spreads of the Euro area, authors use the German federal government securities as a risk-free rate while they use the US treasury yield for American reference entities [2] (Blanco et al, 2005;Delatte et al, 2012;Coudert and Gex, 2013;Gyntelberg et al, 2013;Costantini et al, 2014;Eichler, 2014;Fontana and Scheicher, 2016;Gilchrist and Mojon, 2016).…”

Section: The Risk-free Reference Ratementioning

confidence: 99%

“…. ) (Blanco et al, 2005;Zhu, 2006;Baba et al, 2007;Forte and Pena, 2009;Longstaff, 2010;Ammer and Cai, 2011;Delatte et al, 2012;Coudert and Gex, 2013;Lee et al, 2015;Srivastava et al, 2016;Fontana and Scheicher, 2016;Gilchrist and Mojon, 2016;Yu, 2017). On the other hand, other authors propose a multivariate GARCH framework (Baek and Jun, 2011;Calice and Ioannidis, 2012;Audige, 2013;Youssef and Belkacem, 2015;Buchholz and Tonzer, 2016;Tamakoshi and Hamori, 2016).…”

Section: Econometric Approaches and Literature Limitsmentioning

confidence: 99%

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International risk spillover in sovereign credit markets: an empirical analysis

Sabkha

Peretti

Hmaied

2019

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Purpose The purpose of this paper is to study the volatility spillover among 33 worldwide sovereign Credit Default Swap (CDS) markets and their underlying bond markets. Design/methodology/approach In contrast to prior studies, the authors incorporate heteroscedasticity, asymmetric leverage effects and long-memory features of sovereign credit spreads simultaneously through a bivariate FIEGARCH model and a Bayesian cointegrated vector autoregressive model. Findings Similar to the literature, the findings confirm that strong evidence of credit risk spillover between credit markets is accentuated during two recent crisis periods. However, the country-by-country analysis indicates that countries exhibit different sensitivity levels and divergent reactions to financial shocks. Further, the authors show that the bidirectional interrelationship evolves over time and across countries emphasizing the necessity of time-varying national regulatory policies and trading positions. Originality/value Based on a large data set that covers the recent two financial crises and using complex methods, the work focuses on sovereign tensions that have repercussions on banks’ solvency and refinancing conditions. Yet, the study is a hot topic since that during crisis periods in the financial markets, direct and indirect interconnections increase between sovereign risk and banking risk. Using new econometric approaches, the results show that each country exhibits a different behavior toward the credit risk which is relevant to both portfolio managers and policy makers. The time-varying spillover effects detected between markets are an accurate indicator of financial stability, allowing policy makers to put in place personalized economic policies. On the other hand, markets’ participants could take advantages of the results by adjusting their trading and hedging positions on the dynamic co-movements. The findings reveal, as well, that the sovereign crisis has more weakened the global financial and banking system than the subprime crisis. The authors previously tackled the cross-country contagion phenomenon in the CDS markets, and this manuscript builds on the prior study to enhance the obtained results.

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“…Highly exposed to the su ering of their own sovereign, 1 banks located in stressed countries faced higher funding costs than banks located in non-stressed countries (Durré et al, 2014). 2 Fragmentation quickly fed through retail credit markets, with household and corporate borrowing costs rising sharply in stressed countries (Gilchrist and Mojon, 2018). As a result, policy makers became increasingly concerned that "[the ECB] faced severe impairments to the transmission of monetary policy across the euro area, with marked heterogeneity from country to country" (Draghi, 2014).…”

Section: Introductionmentioning

confidence: 99%

Sovereign Risk and Cross-Country Heterogeneity in the Transmission of Monetary Policy to Bank Lending in the Euro Area

Grandi

2018

SSRN Journal

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Is the transmission of monetary policy to bank lending heterogeneous across euro area countries? is paper employs annual bank level data to test whether the bank lending channel of monetary policy was heterogeneous in the euro area over the period 2007-2016. To do so it follows a simple procedure that allows direct testing of how monetary policy a ected similar banks located in di erent countries. Results indicate that the transmission of monetary policy to bank lending was heterogeneous across countries that were di erently exposed to the sovereign debt crisis. On average, the same 1% cut in the policy rate led to a 1.6% increase in lending by banks located in non-stressed countries as opposed to a 0.4% increase for banks located in countries under severe sovereign stress. Unconventional monetary policy -as captured by the ECB shadow rate -was also unevenly transmi ed to bank lending. Exposure to sovereign risk is identi ed as a key source of heterogeneity. Within stressed countries, banks with larger sovereign exposures reacted to monetary easing by expanding lending by less than banks with smaller exposures. As a result, monetary accommodation was smoothly transmi ed to lending only by banks with limited exposure to sovereign risk. In response to the same 1% policy rate cut, the credit expansion of highly exposed stressed countries banks was instead 2.75% weaker than that of banks in non-stressed countries.ese ndings support existing evidence on sovereign risk having direct adverse consequences for bank lending and highlight the extent to which sovereign risk aggravated heterogeneities in the transmission on monetary policy to the real economy via the banking system during the euro area debt crisis.

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Credit Risk in the Euro Area

Cited by 152 publications

References 35 publications

The time-varying relationship between credit spreads and employment growth

The time-varying relationship between credit spreads and employment growth

International risk spillover in sovereign credit markets: an empirical analysis

Sovereign Risk and Cross-Country Heterogeneity in the Transmission of Monetary Policy to Bank Lending in the Euro Area

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