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Sovereign bond market spillovers from crisis-time developments in Greece

Working papers
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Download PDF: Working Paper 45


This paper demonstrates that events in Greece worsened euro area countries' tail risks during the sovereign debt crisis.

Authors: Daragh Clancy, Carmine Gabriele and Diana Zigraiova (all ESM)



The systemic importance of a country is a crucial component in the European Stability Mechanism's assessment of financial assistance requests. However, disentangling the effect of developments in one country on other countries in real time is fraught with difficulties. Using empirical methods that provide ex-ante measures of risk exposure, we find that changes in the tail risks of Greek sovereign bond returns resulted in immediate and significant cross-market spillovers to other euro area sovereign bond returns. Our approach provides real-time insights on evolving cross-market interdependencies, such as Germany gradually becoming a safe haven from Greece. We confirm that developments in Greece drive our tail-risk results by linking them to a newly developed intra-day event database. This approach also allows us to provide a more intuitive quantification of the spillovers emanating from Greece. Taken together, our findings demonstrate that developments in Greece significantly affected other euro area sovereign bond markets over and beyond global, euro area and country-specific factors. Our results provide evidence for the systemic importance of Greece throughout the European sovereign debt crisis.

Disclaimer: This Working Paper should not be reported as representing the views of the ESM. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the ESM or ESM policy. No responsibility or liability is accepted by the ESM in relation to the accuracy or completeness of the information, including any data sets, presented in this Working Paper.

Keywords: crisis, events, narrative, sovereign bonds, spillovers, tail risks

JEL codes: C22; G01; G15; F36

Source: European Stability Mechanism | Working Paper Series | Volume 2020 | No 45 | June 2020 | 74 Pages

Copyright © European Stability Mechanism, 2020 | All rights reserved. Any reproduction, publication and reprint in the form of a different publication, whether printed or produced electronically, in whole or in part, is permitted only with the explicit written authorisation of the European Stability Mechanism.