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Transmission of sovereign risk in the Euro crisis


Brutti, Filippo; Saure, Philip (2012). Transmission of sovereign risk in the Euro crisis. Studienzentrum Gerzensee 12.01, Stiftung der Schweizerischen Nationalbank.

Abstract

We assess the role of financial linkages in the transmission of sovereign risk in the Euro Crisis. Building on the narrative approach by Romer and Romer (1989), we use
financial news to identify structural shocks in a vector autoregressive model of daily sovereign CDS premia for eleven European countries. To estimate how these shocks
transmit across borders, we use data on cross-country bank exposures to sovereign debt. Our results indicate that exposure to Greek sovereign debt and the debt of
Greek banks constitute important transmission channels. All else being equal, the transmission rate to the country with the greatest exposure to Greece (1.22 percent of GDP) has been roughly 46 percent higher than the rate to the country with the least exposure (0.08 percent of GDP).

Abstract

We assess the role of financial linkages in the transmission of sovereign risk in the Euro Crisis. Building on the narrative approach by Romer and Romer (1989), we use
financial news to identify structural shocks in a vector autoregressive model of daily sovereign CDS premia for eleven European countries. To estimate how these shocks
transmit across borders, we use data on cross-country bank exposures to sovereign debt. Our results indicate that exposure to Greek sovereign debt and the debt of
Greek banks constitute important transmission channels. All else being equal, the transmission rate to the country with the greatest exposure to Greece (1.22 percent of GDP) has been roughly 46 percent higher than the rate to the country with the least exposure (0.08 percent of GDP).

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:F36, F42, F21, C30
Uncontrolled Keywords:Cross-country Transmission, Sovereign Risk, Financial Linkages, Euro Crisis, Narrative Approach
Language:English
Date:January 2012
Deposited On:14 Mar 2013 16:23
Last Modified:14 Aug 2017 11:30
Series Name:Studienzentrum Gerzensee
Number of Pages:50
Additional Information:Presentations: 1. Seminar at Study Center Gerzensee, "Transmission of Sovereign Risk in the Euro Area" (joint with Philip Saure). January 2012. 2. XV Workshop in International Economics and Finance, organized by CEPR and hosted by CREi, Barcelona. 1-2 July 2012. Title: Secondary Bond Markets and Sovereign Risk in Times of Crisis: An Empirical Assessment (joint with Philip Saure') 3. Seminar at UNIL, "Transmission of Sovereign Risk in the Euro Area" (joint with Philip Saure). 16 October 2012. 4. Seminar at University of Konstanz, "Transmission of Sovereign Risk in the Euro Area" (joint with Philip Saure). 29 October 2012.
Free access at:Official URL. An embargo period may apply.
Official URL:http://www.szgerzensee.ch/fileadmin/Dateien_Anwender/Dokumente/working_papers/wp-1201.pdf

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