Identifying Sovereign Risk Spillover Channels: A Spatial Econometric Approach

ABSTRACT

We apply novel spatial econometric techniques to investigate spillovers in sovereign risk for 41 advanced and emerging economies during 2004–2019. We find that sovereign risk spillover channels that play major roles in various periods are different. Real linkages (trade, financial, and geography) and information channel both play major roles in spillover effects during the full sample period. During the financial crisis period, only business connections (trade and financial) have an effect, while only the geographical distance channel did not have an effect during the European debt crisis period. We also assess the relative importance of the direct and indirect effects of macroeconomic variables. We observe that the long-term effects are larger than the short-term effects. Ultimately, our analysis emphasizes the importance of considering multiple channels when analyzing sovereign risk spillovers.

KEYWORDS:

• Sovereign risk
• transmission channel
• spillover effect
• spatial econometrics

JEL:

• C58
• F34
• F62
• G15

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [No.71771042, No.72171039], The Fundamental Research Funds for the Central Universities [N180614004] and The Project of Humanities and Social Science of Ministry of Education of China [Grant No.18YJCZH224].