Was a deterioration in ‘connectedness’ a leading indicator of the European sovereign debt crisis?

Hamill, Philip A.; Li, Youwei; Pantelous, Athanasios; Vigne, Samuel A.; Waterworth, James

Abstract

This paper investigates network connectedness of European sovereign bond markets from 2005 to 2011. To overcome weaknesses in alternative methodologies to estimate network connectedness we adopt the unified methodology recommended by Diebold and Yilmaz (2014). Our analysis shows that European sovereign bond market connectedness deteriorated with the onset of the global financial crisis which was exacerbated by the European sovereign debt crisis, with some peripheral countries deteriorating into isolation by 2011. Dynamic connectedness modelling shows that the Lanne-Nyberg (2016) total connectedness measure was much more volatile than the Pesaran-Shin (1998) approach and suggests that the Lanne-Nyberg variance decomposition was a leading indicator of instability from early 2008 to July 2008, and should be used as these decomposition methods lead to different systemic risk and vulnerability rankings.

Citation

Hamill, P. A., Li, Y., Pantelous, A., Vigne, S. A., & Waterworth, J. (2021). Was a deterioration in ‘connectedness’ a leading indicator of the European sovereign debt crisis?. Journal of International Financial Markets, Institutions and Money, Article 101300. https://doi.org/10.1016/j.intfin.2021.101300

• Journal Article Type: Article
• Acceptance Date: Jan 24, 2021
• Online Publication Date: Feb 2, 2021
• Publication Date: 2021-02
• Deposit Date: Feb 3, 2021
• Publicly Available Date: Feb 3, 2022
• Journal: Journal of International Financial Markets, Institutions and Money
• Print ISSN: 1042-4431
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Article Number: 101300
• DOI: https://doi.org/10.1016/j.intfin.2021.101300
• Keywords: Financial crisis; Networks; Sovereign bonds; Connectedness
• Public URL: https://hull-repository.worktribe.com/output/3709781