Go Tamakoshi

Volatility and mean spillovers between sovereign and banking sector CDS markets: a note on the European sovereign debt crisis

This article empirically assesses causality-in-variance and causality-in-mean between the Eurozone banking sector Credit Default Swap (CDS) index and the Greek sovereign CDS spread. We employ the Cross-Correlation Function (CCF) approach developed by Hong (2001) to daily data from January 2008 to December 2011. Our key findings are twofold. First, before the European sovereign debt crisis, significant unidirectional causality-in-variance and causality-in-mean were found from the bank CDS to the Greek sovereign CDS spreads. Second, during the crisis period, we detected significant causality-in-variance from the Greek sovereign CDS spreads to the bank CDS, implying that the deteriorated Greek sovereign solvency might have triggered contagion effects on the banking sector in the area. Our results are relevant for policymakers who provide regulations for the CDS markets.

An asymmetric dynamic conditional correlation analysis of linkages of European financial institutions during the Greek sovereign debt crisis

This article employs the asymmetric dynamic conditional correlation (DCC) model to assess impacts of the recent sovereign debt crisis on the time-varying correlations of five European financial institutions holding large amounts of Greek sovereign bonds (National Bank of Greece, BNP Paribas, Dexia, Generali, and Commerzbank). Contrary to the results of preceding studies, we find significant increases in the correlations between several combinations of the financial institutions’ stock returns after the inception of the sovereign debt crisis, indicating contagion effects. Moreover, our findings show that the parameter of the standardized negative residuals is statistically significant in the case of DCC estimates between two specific institutions. This suggests that the conditional correlation of stock returns between the two institutions is more significantly influenced by negative shocks than by positive innovations to return.

An asymmetric DCC analysis of correlations among bank CDS indices

This study explores the time-varying correlations among the bank industry Credit Default Swap (CDS) indices for the EU, the UK and the US, using the asymmetric Dynamic Conditional Correlation (DCC) model developed by Cappiello et al. (2006). The main findings of the study include: (i) The correlations between each pair of bank CDS indices vary substantially over time. (ii) There is evidence of asymmetric dynamic correlations between the EU and the UK bank CDS indices. The correlations between them tend to be higher when responding to joint downward shocks. (iii) The conditional correlations between the US bank CDS and the UK and the EU bank CDS, respectively, exhibited significant drops immediately after the collapse of Lehman Brothers during the global financial crisis. (iv) The sovereign debt crisis dummy in Autoregressive (AR) models, applied to the estimated DCCs, is significantly positive for the UK and US bank CDSs, as shown by the increased correlations after the onset of the debt crisis.

Real Oil Prices, Real Economic Activity, Real Interest Rates, and the US Dollar: A Cointegration Analysis with Structural Breaks

In this paper, we examine the relationship among real oil prices, global economic activity, real value of the US dollar, and real interest rates during the period 1988:1 to 2011:12. We employ the Gregory and Hansen (1996) cointegration test with structural breaks to investigate the long-run equilibrium and analyze the short-term Granger causality as well. Our findings indicate that real oil prices are cointegrated with the three factors mentioned above and are affected positively by real economic activity and negatively by real interest rates and the real value of the US dollar. We also find significant short-run causality from real economic activity to real oil prices, but no significant causality from real interest rate and real value of US dollar to real oil price is detected. These findings are relevant for both policymakers and investors who wish to conduct forecasts for future oil prices on the basis of a solid understanding of its key drivers

Nonlinear adjustment between the Eonia and Euribor rates: a two-regime threshold cointegration analysis

This article examines the dynamic relationship between two key European short-term interest rates, the Eonia rate (EON) and the 3-month Euribor rate (ER3). Applying a threshold cointegration method developed by Hansen and Seo (2002) to monthly data over the period 1999 to 2011, we confirm that the null hypothesis of linear cointegaration is rejected in favour of a two-regime threshold cointegration model with regime-dependent short-run dynamics. Importantly, we show that an error correlation through a Euribor rate adjustment tends to occur only in an extreme regime, where ER3 increases relative to EON, such as was vigorously implemented immediately after the global financial crisis. In a typical regime, short-run responses are executed, instead, by an Eonia rate adjustment, which is not necessarily consistent with the conventional view that EON should anchor longer-term interest rates.

Dynamic linkages among cross-currency swap markets under stress

This article examines the impacts of the European sovereign debt crisis on the Dynamic Conditional Correlation (DCC) between three European currencies (EUR, CHF and GBP) and the US dollar for 1-year maturities. We found that the correlation between each pair of the swap prices significantly fluctuated over time and exhibited a higher co-movement during the crisis period, suggesting a higher degree of market integration. Importantly, applying a linear regression framework with a crisis dummy variable to the derived DCC, we find evidence of spillover effects of the sovereign debt turbulence to the cross-currency swap markets, as reflected in the increased co-movement between the EUR/USD and CHF/USD swap prices.