Abstract/Summary

This thesis is comprised of three interconnected chapters that critically examine the factors influencing sovereign credit risk determination and the subsequent spillover effects prevalent among peripheral European countries. The research posits, and subsequently confirms, a differential behavior of sovereign credit levels between crisis and non-crisis periods. This observation not only presents nuanced, multidimensional insights on the subject matter but also fills a gap in the existing body of literature. In the second chapter, an in-depth analysis of the determinants of sovereign bond spreads is undertaken utilizing a dynamic panel regression approach. The study identifies monetary policies, economic fundamentals, and market liquidity as definitive elements influencing a nation’s risk level. Chapter 3 incorporates a vector autoregressive framework to probe the interrelationships and Granger causality between shocks in sovereign credit default swaps spreads and potential determinants. This is a crucial step towards understanding the intricate dynamics between various financial elements and sovereign risk. Lastly, the thesis delves into the examination of spillover effects among the sovereign credit default swaps spreads of core and peripheral European countries. This discourse offers empirical evidence of sovereign risk contagion and flow among these nations across various phases, including periods of sovereign debt crises, post-crisis recovery, and the COVID-19 pandemic epoch. The study thereby contributes to a deeper comprehension of financial contagion mechanisms and sovereign credit risk behavior in response to macroeconomic shocks and monetary policies.