Bad or good neighbours: a spatial financial contagion study, Studies in Economics and Finance, ISSN 1086-7376
Author(s)
Foglia, Matteo
Ortolano, Alessandra
Di Febo, Elisa
Angelini, Eliana
Date Issued
2020
Type
article
Journal
Abstract
Purpose – The purpose of this paper is to study the evolution of financial contagion between Eurozonebanks, observing the credit default swaps (CDSs) market during the period 2009–2017.
Design/methodology/approach – The authors use a dynamic spatial Durbin model that enables to
explore the direct and indirect effects over the short and long run and the transmission channels of the contagion.
Findings – The results show how contagion emerges through physical and financial market links betweenbanks. This finding implies that a bank can fail because people expect other related financial institutions tofail as well (self-fulfilling crisis). The study provides statistically significant evidence of the presence of creditrisk spillovers in CDS markets. The findings show that equity market dynamics of “neighbouring” banks areimportant factors in risk transmission.
Originality/value – The research provides a new contribution to the analysis of EZ banking risk contagion, studying CDS spread determinants both under a temporal and spatial dimension. Considering the cross-dependence of credit spreads, the study allowed to verify the non-linearity between the probability of default of a debtor and the observed credit spreads (credit spread puzzle). The authors provide information on the transmission mechanism of contagion and, on the effects among the largest banks. In fact, through the study of short- and long-term impacts,
direct and indirect, the paper classify banks of systemic importance according to their effect on the financial system.