Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/129206
Authors: 
Podstawski, Maximilian
Velinov, Anton
Year of Publication: 
2016
Series/Report no.: 
DIW Discussion Papers 1550
Abstract: 
The theoretical literature remains inconclusive on whether changes in bank exposure towards the domestic sovereign have an adverse effect on the sovereign risk position via a diabolic loop in the sovereign-bank nexus or reduce perceived default risk by acting as a disciplinary device for the sovereign. In this paper we empirically analyze the impact of exogenous changes in bank exposure on the risk position of the sovereign within a Markov switching structural vector autoregressive in heteroscedasticity (MSH-SVAR) framework for a set of EMU countries. We add to the methodological literature by allowing for regime dependent shock transmissions according to the volatility state of the financial system. Finding support for both, a stabilizing and a destabilizing effect, we document a clear clustering among the country sample: Rising bank exposure increased default risk for the EMU periphery, but decreased credit risk for the core EMU countries during times of financial stress.
Subjects: 
Markov-switching
heteroscedasticity
identification
sovereign-bank interlinkages
sovereign risk
credit default swap
contagion
JEL: 
C32
E44
G10
Document Type: 
Working Paper

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