Francesco Ravazzolo (Norge Bank)
Thursday 25th October, room 745, 12:30

Abstract

This paper analyzes the sovereign risk contagion using CDS and bond spread for the major euro area countries. Using several econometric approaches (non linear regression, quantile regression and Bayesian quantile regression with heteroskedasticity) we show that propagation of shocks in Europe's CDS's has been remarkably constant for the period 2008-2011 even though in a significant part of the sample periphery countries have been extremely affected by their sovereign debt and fiscal situations. Thus, the integration among the different countries is stable, and the risk spillover among countries is not affected by the size of the shock. Results for the same sample are confirmed by bond spreads. However, the analysis on bond data shows that there is a change in the intensity of the propagation of shocks in the pre crisis period (2003-2006) and the post Lehman one (2008-2011) and the coefficients actually come down, not up! All the increases in correlation we have witnessed in the last two years is coming from larger shocks and the heteroskedasticity in the data, and not from similar shocks propagated with higher intensity across Europe. This is the first paper, to our knowledge, where a Bayesian quantile regression approach is used to measure contagion. This methodology is particularly good to deal with non-linear and unstable transmission mechanisms.

View this paper here (this paper is being marginally revised and the seminar will be given with the updated version)