Sovereign credit and geopolitical risks during and after the EMU crisis

Document Type

Article

Publication Title

International Journal of Finance and Economics

Publication Date

7-1-2024

Abstract

This paper focuses on the sovereign crisis of the Euro debt crisis era, and we address the existence of the relationship of CDS and bond markets sovereign credit risk pricing for selected core and periphery EMU countries, during and after the 2009 EMU crisis. We study this relationship in conjunction to geopolitical risk as a measure of macroeconomic uncertainty. We use daily observations for several bond maturities and CDS premium with reference to the core (France and Germany) versus periphery EMU countries (Portugal, Italy, Ireland Spain, and Greece) for the period 2009 to 2014. To measure global geopolitical risk, we employ the Caldara and Iacoviello (2022) global geopolitics index (GPR). Using alternative econometric approaches, we find adequate evidence of volatility spillovers between the geopolitical risk index and sovereign risk markets mainly during the crisis period (2009–2012) and weaker during the easing of the eurozone debt crisis period (2012–2014). Moreover, based on Granger causality the estimation of the short- term dynamics reveals a significant linkage during the post-crisis period rather than during crisis. During the crisis period, we found significant dynamic responses between GPR and bond yields.

Volume

29

Issue

3

First Page

3692

Last Page

3712

DOI

10.1002/ijfe.2852

ISSN

10769307

E-ISSN

10991158

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