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Sovereign Credit Risk Co‐Movements in the Eurozone: Simple Interdependence or Contagion?
Author(s) -
Buchholz Manuel,
Tonzer Lena
Publication year - 2016
Publication title -
international finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.458
H-Index - 39
eISSN - 1468-2362
pISSN - 1367-0271
DOI - 10.1111/infi.12099
Subject(s) - economics , sovereign debt , credit risk , credit default swap , sovereignty , monetary economics , swap (finance) , financial contagion , sovereign credit , financial economics , financial crisis , macroeconomics , finance , politics , political science , law
We investigate credit risk co‐movements and contagion in the sovereign debt markets of 17 industrialized countries during the period 2008–2012. We use dynamic conditional correlations of sovereign credit default swap spreads to detect contagion. This approach allows us to separate contagion channels from the determinants of simple interdependence. The results show that, first, sovereign credit risk co‐moves considerably, particularly among eurozone countries and during the sovereign debt crisis. Second, contagion varies across time and countries. Third, similarities in economic fundamentals, cross‐country linkages in banking and common market sentiment constitute the main channels of contagion.