Transmission of Financial Stress in Europe: The Pivotal Role of Italy and Spain, but not Greece

 
Author/Editor: Brenda González-Hermosillo ; Christian A Johnson
 
Publication Date: May 02, 2014
 
Electronic Access: Free Full text (PDF file size is 1,106KB).
Use the free Adobe Acrobat Reader to view this PDF file

Link to data for this title. (ZIP file size is 151KB).
 
Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
 
Summary: This paper proposes a stochastic volatility model to measure sovereign financial distress. It examines how key European sovereign credit default swap (CDS) spreads affect each other; specifically, the paper analyses the volatility structure of Germany, Greece, Ireland, Italy, Spain and Portugal. The stability of Germany is a close proxy for the resilience of the euro area as markets use Germany’s sovereign CDS as a hedge for systemic risk. Although most of the CDS changes for Germany during 2009–12 were due to idiosyncratic factors, market developments in Italy and Spain contributed significantly, likely due to their relative importance in the region. Changes in Greece’s sovereign CDS had no significant effect on Germany’s sovereign CDS despite initial widespread concerns about such linkages. Spain and Italy show a notable co-dependence in explaining each other’s volatility while Germany also plays an important role. It is found that extreme bad news led to persistent and nearly permanent effects on the stochastic volatility of European sovereign CDS spreads.
 
Series: Working Paper No. 14/76
Subject(s): Financial risk | Italy | Spain | Greece | Euro Area | Financial crisis | Spillovers | Global Financial Crisis 2008-2009 | Economic models

 
English
Publication Date: May 02, 2014
ISBN/ISSN: 9781484368190/1018-5941 Format: Paper
Stock No: WPIEA2014076 Pages: 28
Price:
US$18.00 (Academic Rate:
US$18.00 )
 
 
Please address any questions about this title to publications@imf.org