Assessing the role of transmission channels in sovereign risk: a spatial econometrics approach

Mercredi | 2015-06-17
B103 à 12h


The recent financial crisis has shed light on how fast sovereign risk can spread from one economy to another as well as on the dramatic role macroeconomic and financial transmission channels could play for the worldwide economic stability. In the case of Europe for instance, the sovereign debt-related turmoil in Greece was rapidly transmitted to other euro-area countries as materialized by the sharp increase in bond yields spread of the whole area. Such event has led to a growing literature in macroeconomics and financial econometrics interested in better understanding and modelling the phenomenon of  » contagion » . We contribute to this strand of literature by identifying the role of economic, financial, commercial and institutional linkages in the transmission of sovereign risk. Mainly, we study the dynamics of 20 OECD countries bond yield spreads with respect to United States over the period 2008-2012, using spatial dynamic panel data model. This framework allows us to account for interdependences in modelling bond spreads as well as selecting the channel that best explains their dynamic. We find that all considered channels are relevant to capture the diffusion of sovereign risk. However our selection strategy based on information criteria shows that the institutional channel is the most relevant.