The Nexus between Sovereign Default Risk and Bank Fragility: Evidence from China

Authors

DEEV Oleg HODULA Martin

Year of publication 2014
Type Article in Proceedings
Conference European Financial Systems 2014. Proceedings of the 11th International Scientific Conference
MU Faculty or unit

Faculty of Economics and Administration

Citation
Field Management and administrative
Keywords sovereign default risk; bank default risk; CDS; China; risk transfer
Description In this paper we investigate the interdependence of the sovereign default risk and its domestic banks on the example of China during the time period of 2003-2011 using credit default swaps as a proxy for default risk. China’s banking industry has predominantly remained state-owned, even after a series of significant reforms in the last two decades. We employ bivariate vector autoregressive (VAR) and vector error correction (VECM) framework to analyze the short- and long-run dynamics of the chosen data series. To describe the direction of the discovered dynamics, we use Granger causality. We find evidence of a stable long-run relationship between sovereign and bank CDS spreads in chosen time period. The relationship was significant only in a state-bank direction and not vice versa.
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