Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/231764 
Year of Publication: 
2018
Citation: 
[Journal:] Journal of Banking & Finance [ISSN:] 0378-4266 [Volume:] 88 [Publisher:] Elsevier [Place:] Amsterdam [Year:] 2018 [Pages:] 63-75
Publisher: 
Elsevier, Amsterdam
Abstract: 
The theoretical literature remains inconclusive on whether changes in bank exposure to the domestic sovereign have an adverse effect on the sovereign risk position through 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
Published Version’s DOI: 
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Article
Document Version: 
Accepted Manuscript (Postprint)

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