Journal article

Financial sector bailouts, sovereign bailouts, and the transfer of credit risk

M Greenwood-Nimmo, Jingong Huang, Viet Hoang Nguyen

Journal of Financial Markets | Elsevier | Published : 2019

Abstract

We develop an empirical network model to study credit risk spillovers among a group of eighteen sovereigns and their financial sectors from 2006 to 2015. Initially a net source of credit risk, the financial sector becomes a net recipient after the 2008 financial sector bailouts in many countries. Fiscal fundamentals explain much of the heterogeneity in financial-sovereign spillovers over this period. The subsequent European sovereign bailouts disrupt the feedback between sovereign risk and local financial sector risk. Depending on the initial fiscal position of the target country, sovereign bailouts may also disrupt international credit risk spillovers originating from the target sovereign.

Grants

Awarded by Australian Research Council


Funding Acknowledgements

We have benefited from the constructive comments of seminar participants at the University of Utah (April 2017) and conference participants at the 2017 Asian Meeting of the Econometric Society (Hong Kong, June 2017), the 6th Singapore Economic Review Conference (Singapore, August 2017) and the 70th European Summer Meeting of the Econometric Society (Lisbon, August 2017). We are grateful for many illuminating discussions with Heather Anderson, Renee Fry-McKibbin, Joe Hirschberg, Faek Menlo Ali, Barry Rafferty, Yongcheol Shin, Chris Skeels, Tomasz Woiniak and Eliza Wu. We thank Matthias Chong, Vijay Mogha and Stewart Somerville at Markit for their assistance and flexibility in the delivery of the credit default swap data. We also thank Raphael Brun-Aguerre at JP Morgan for providing data on the realized variance of the U.S. 10-year Treasury Note. Greenwood-Nimmo gratefully acknowledges financial support from the Australian Research Council under grant number DE150100708 and the hospitality of the University of York during a sequence of research visits over the period 2015-2017.