The diabolical sovereigns/banks risk loop: A VAR quantile design

This article focuses on the tail risk spillover (co-movement) effect between the sovereign and banking sector in the eurozone, using a novel multivariate quantile model (VAR for VaR method) and then the relative pseudo quantile impulse response functions. We analysed the causality risk transmission at different quantiles (up/downside), using daily credit default swap from 9 October 2008 to 29 May 2018. Our main findings confirm the two-way causality between these credit markets, highlight the presence of an asymmetry in the mechanisms of shock transmissions between core and no core bank/sovereign, respectively. Also, we measure the directional predictability in the quantiles using the cross-quantilogram approach. The results suggest that a high credit risk sovereign predicts high sovereign risk (and vice versa).