Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/184656
Authors: 
Böhm, Hannes
Eichler, Stefan
Year of Publication: 
2018
Series/Report no.: 
IWH Discussion Papers 19/2018
Abstract: 
We isolate the direct bank-to-sovereign distress channel within the eurozone's sovereign-bank-loop by exploiting the global, non-eurozone related variation in stock prices. We instrument banking sector stock returns in the eurozone with exposure-weighted stock market returns from non-eurozone countries and take further precautions to remove any eurozone crisis-related variation. We find that the transmission of instrumented bank distress, while economically relevant, is significantly smaller than the corresponding coefficient in the unadjusted OLS framework, confirming concerns on reverse causality and omitted variables in previous studies. Furthermore, we show that the spillover of bank distress is significantly stronger for countries with poorer macroeconomic performances, weaker financial sectors and financial regulation and during times of elevated political uncertainty.
Subjects: 
sovereign-bank-loop
bank distress
instrumental variable estimation
bank exposures
macroeconomic performance
JEL: 
E44
F3
G15
G21
G28
Document Type: 
Working Paper

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