The European crisis in the late 2000s has revealed a vicious circle between the financial health of governments and banks, reflecting banks' holdings of sovereign debt and government commitments to financial bailouts. Understanding the linkages between sovereign and banking risk is a central element of an effective macroprudential policy framework. However, identifying the direction of causality between the two is a major challenge. I tackle this problem by compiling a timeline of news between 2004 and 2013 and separating them into news that primarily affect banks, primarily affect governments, or impact both. The shocks identified by this narrative approach are used as instruments in a TSLS regression that estimates the effect of sovereign Credit Default Swaps (CDS) spreads on banking CDS spreads. The analysis relies on a panel of daily banking and sovereign CDS spreads for ten Euro Area countries between 2004 and 2013. I find that the impact is heterogeneous across space and time. In particular, shocks to sovereign CDS spreads in Periphery countries significantly increase the banking CDS spreads in these countries during the financial crisis. No such link is found for the Core countries. Finally, I show that policy decisions such as the intervention by Mario Draghi in July 2012 affect the transmission, and that the subsequent introduction of Outright Monetary Transactions by the European Central Bank broke the sovereign-bank nexus.
Economic vulnerabilities may remain latent for long periods and may only reveal their full impact on a country's fiscal sustainability when the economy undergoes a significant shock. This could lead researchers to understate the impact of such vulnerabilities on a country's probability of sovereign default, particularly at times of global or local financial stress. We analyze data from a panel of 113 countries over the period 1990-2014 to examine the impact of debt burden indicators and macro fundamentals on risk of sovereign default in emerging markets and advanced economies. We test whether economic fundamentals and fiscal vulnerabilities have a stronger impact on the risk of sovereign default during periods of financial distress than during tranquil times. We find that financial stress significantly amplifies the impact of the debt-to-GDP ratio, the stock of international reserves, and GDP per capita on the probability of sovereign default.
We apply sentiment analysis to Twitter messages in Spanish to build a Sentiment Risk Index for the financial
sector in Mexico. Using a sample of tweets that covers the period 2006-2019, we classify the tweets considering
whether they reflect a positive or negative shock on Mexican banks, or whether they are merely informative. We
compare the performance of three classifiers: the first based on word polarities from a pre-defined dictionary,
the second on a Support Vector Machine Classifier and the third on Neural Networks. We find that the Support
Vector Machine classifier has the best performance of the three we test. We also compare this proposed Sentiment
Risk Index with existing indicators of financial stress based on quantitative variables. We find that this novel
index captures the effect of sources of financial stress that are not explicitly reported in quantitative risk measures,
such as financial frauds, fails in payment systems and money laundering. We also show that a shock in the Twitter
Sentiment Index increases stock market volatility and foreign exchange rate volatility, having a significant effect
on overall financial market risk, especially for the private sector.
"Liberalizzare l'economia per salvare l'euro", with Francesco Giavazzi, introduction to Agnès Bénassy-Quéré and Benoît Coeuré, "L'euro della discordia: come è possibile un'economia della moneta unica" Università Bocconi Editore,Milan, November 2014. Italian edition by Caterina Rho.
Sovereign Risk Spillovers through Banks in the Euro Area