Dynamic connectedness between credit and liquidity risks in euro area sovereign debt markets

Marta Gómez-Puig; Mary Pieterse-Bloem; Simón Sosvilla-Rivero

doi:10.1016/j.mulfin.2023.100800

Dynamic connectedness between credit and liquidity risks in euro area sovereign debt markets

Marta Gómez-Puig, Mary Pieterse-Bloem^*, Simón Sosvilla-Rivero

^*Corresponding author for this work

Business Economics

Research output: Contribution to journal › Article › Academic › peer-review

2 Citations (Scopus)

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Abstract

We examine the dynamic interconnections between sovereign credit and liquidity risks in ten euro area countries at the 5-year maturity with daily CDS data from IHS Markit and high-frequency data from MTS between 2008 and 2018 using the extended TVP-VAR connectedness approach of Antonakakis et al. (2020). We find that, for most of the period, net connectedness is from credit risk to liquidity risk, but this indicator is time-dependent, detecting some episodes where it goes from liquidity risk to credit risk. We set up an event study and discover that most of the latter episodes can be related to several unconventional monetary policy measures of the ECB. Then, we examine the drivers of the connectedness indicator using a Probit model. Our results suggest that a decline in global funding liquidity, monetary policy shocks and economic policy uncertainty increase the probability of risk transmission from liquidity to credit, while tensions in financial markets and the deterioration of fiscal sustainability are factors that reduce such a probability.

Original language	English
Article number	100800
Journal	Journal of Multinational Financial Management
Volume	68
DOIs	https://doi.org/10.1016/j.mulfin.2023.100800
Publication status	Published - Jun 2023

Bibliographical note

Funding Information:
The authors wish to thank three anonymous referees and the editor for their helpful comments and suggestions on a previous draft of this article, which have enabled them to introduce substantial improvements. This paper is based on work supported by the Spanish Ministry of Science and Innovation [grant PID2019-105986GB-C21 ] and the Erasmus Trust Fund [grant 97000.2019.818/071/RB ].

Publisher Copyright:
© 2023 The Authors

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10.1016/j.mulfin.2023.100800Licence: CC BY

1-s2.0-S1042444X23000191-mainFinal published version, 2.6 MBLicence: CC BY

Cite this

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title = "Dynamic connectedness between credit and liquidity risks in euro area sovereign debt markets",

abstract = "We examine the dynamic interconnections between sovereign credit and liquidity risks in ten euro area countries at the 5-year maturity with daily CDS data from IHS Markit and high-frequency data from MTS between 2008 and 2018 using the extended TVP-VAR connectedness approach of Antonakakis et al. (2020). We find that, for most of the period, net connectedness is from credit risk to liquidity risk, but this indicator is time-dependent, detecting some episodes where it goes from liquidity risk to credit risk. We set up an event study and discover that most of the latter episodes can be related to several unconventional monetary policy measures of the ECB. Then, we examine the drivers of the connectedness indicator using a Probit model. Our results suggest that a decline in global funding liquidity, monetary policy shocks and economic policy uncertainty increase the probability of risk transmission from liquidity to credit, while tensions in financial markets and the deterioration of fiscal sustainability are factors that reduce such a probability.",

author = "Marta G{\'o}mez-Puig and Mary Pieterse-Bloem and Sim{\'o}n Sosvilla-Rivero",

note = "Funding Information: The authors wish to thank three anonymous referees and the editor for their helpful comments and suggestions on a previous draft of this article, which have enabled them to introduce substantial improvements. This paper is based on work supported by the Spanish Ministry of Science and Innovation [grant PID2019-105986GB-C21 ] and the Erasmus Trust Fund [grant 97000.2019.818/071/RB ]. Publisher Copyright: {\textcopyright} 2023 The Authors",

year = "2023",

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AU - Pieterse-Bloem, Mary

AU - Sosvilla-Rivero, Simón

N1 - Funding Information: The authors wish to thank three anonymous referees and the editor for their helpful comments and suggestions on a previous draft of this article, which have enabled them to introduce substantial improvements. This paper is based on work supported by the Spanish Ministry of Science and Innovation [grant PID2019-105986GB-C21 ] and the Erasmus Trust Fund [grant 97000.2019.818/071/RB ]. Publisher Copyright: © 2023 The Authors

PY - 2023/6

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N2 - We examine the dynamic interconnections between sovereign credit and liquidity risks in ten euro area countries at the 5-year maturity with daily CDS data from IHS Markit and high-frequency data from MTS between 2008 and 2018 using the extended TVP-VAR connectedness approach of Antonakakis et al. (2020). We find that, for most of the period, net connectedness is from credit risk to liquidity risk, but this indicator is time-dependent, detecting some episodes where it goes from liquidity risk to credit risk. We set up an event study and discover that most of the latter episodes can be related to several unconventional monetary policy measures of the ECB. Then, we examine the drivers of the connectedness indicator using a Probit model. Our results suggest that a decline in global funding liquidity, monetary policy shocks and economic policy uncertainty increase the probability of risk transmission from liquidity to credit, while tensions in financial markets and the deterioration of fiscal sustainability are factors that reduce such a probability.

AB - We examine the dynamic interconnections between sovereign credit and liquidity risks in ten euro area countries at the 5-year maturity with daily CDS data from IHS Markit and high-frequency data from MTS between 2008 and 2018 using the extended TVP-VAR connectedness approach of Antonakakis et al. (2020). We find that, for most of the period, net connectedness is from credit risk to liquidity risk, but this indicator is time-dependent, detecting some episodes where it goes from liquidity risk to credit risk. We set up an event study and discover that most of the latter episodes can be related to several unconventional monetary policy measures of the ECB. Then, we examine the drivers of the connectedness indicator using a Probit model. Our results suggest that a decline in global funding liquidity, monetary policy shocks and economic policy uncertainty increase the probability of risk transmission from liquidity to credit, while tensions in financial markets and the deterioration of fiscal sustainability are factors that reduce such a probability.

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Dynamic connectedness between credit and liquidity risks in euro area sovereign debt markets

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New Financial Management Study Results from Erasmus School of Economics Described (Dynamic Connectedness Between Credit and Liquidity Risks In Euro Area Sovereign Debt Markets)

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Dynamic connectedness between credit and liquidity risks in euro area sovereign debt markets

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New Financial Management Study Results from Erasmus School of Economics Described (Dynamic Connectedness Between Credit and Liquidity Risks In Euro Area Sovereign Debt Markets)

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