TRANSMISSION MECHANISMS OF INFORMATION FLOWS – A FOCUS ON SOVEREIGN CDS IN A EUROPEAN CONTEXT

Maria Paskaleva

Abstract


The current study observes the following European countries: France, Germany, the United Kingdom, Belgium, Bulgaria, Romania, Greece, Portugal, Ireland, Italy and Spain. The explored time period covers 2003-2016. The VAR model is applied. The relationship between the increasing importance of the macro prudential approach for maintaining the sustainability of the financial system and the dynamics of CDS has been demonstrated. Unlike previous theoretical and empirical studies, we note a strong correlation between the dynamics of the capital markets, the stability of the political system and the balance of the banking sector, on the one hand, and the likelihood of a debt crisis, on the other. The CDS quotes reflect the presence of relationship between- stability of the banking system, economic growth, probability of default of the state. This relation proves to be sustainable in a long term period and creates the preconditions for the occurrence of twin crises by transferring information flows and shocks from the banking system to sovereign CDSs and vice versa. It can be assumed that this type of direct and inverse relations is the basis for the slowdown in economic growth in non-euro area countries, in particular in Bulgaria and Romania.

Keywords


default swaps, VAR, informational influence

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References


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