Working Paper: NBER ID: w20567
Authors: Brent Glover; Seth Richards-Shubik
Abstract: We use a network model of credit risk to measure market expectations of the potential spillovers from a sovereign default. Specifically, we develop an empirical model, based on the recent theoretical literature on contagion in financial networks, and estimate it with data on sovereign credit default swap spreads and the detailed structure of financial linkages among thirteen European sovereigns from 2005 to 2011. Simulations from the estimated model show that a sovereign default generates only small spillovers to other sovereigns. These results imply that credit markets do not demand a significant premium for the interconnectedness of sovereign debt in Europe.
Keywords: Contagion; Sovereign Debt Crisis; Credit Risk; Financial Networks
JEL Codes: D85; F34; F36; G01; L14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sovereign default (F34) | spillovers to other sovereigns (F29) |
| changes in investor risk preferences or beliefs about sovereign defaults (G40) | potential spillovers from balance sheet mechanism (F65) |
| financial interconnectedness among sovereigns (F65) | borrowing costs (H74) |
| differential financial linkages among countries (F65) | differential comovements in sovereign credit risk (F34) |