Abstract/Summary

This paper develops a spatial vector autoregressive (SpVAR) model to investigate the transmission of sovereign, banking, and corporate default risks among eleven Eurozone countries for the January 2008–December 2013 period. The results show that a significant proportion of default risk variation is explained by foreign shocks. However, the cross-border sovereign–bank nexus is statistically significant, but economically moderate. Among the three sectors, shocks to the banking sector play the most critical role. On average, for the eleven countries, a foreign banking shock can explain 7%, 23%, and 18% of the forecast error variance of changes in sovereign, banking, and corporate credit default swap (CDS) spreads, respectively.