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Sovereign and bank dependence in the eurozone: A multi-scale approach using wavelet-network analysis
Institution:1. Department of Mathematics and School of Economics and Management, University of Bologna, Bologna, Italy;2. Department of Economics, Society and Politics, University of Urbino Carlo Bo, Italy;3. Department of Economics, University of Bamberg, Germany;1. School of Finance, Renmin University of China, Beijing 100872, China;2. School of Management and Engineering, Nanjing University, Institute of Financial Innovation, Nanjing 210093, China;1. School of Finance, Xinjiang University of Finance and Economics, 449 Middle Beijing Road, Urumqi 830012, PR China;2. Belt & Road Finance Institute, Central University of Finance and Economics, 39 South College Road, Haidian District, Beijing 100081, PR China;3. International Business College, South China Normal University, 55 Zhongshan Road, Tianhe District, Guangzhou 510631, PR China;1. Department of Accountancy and Finance at University of Antwerp, Stadscampus Prinsstraat 13 S.B.329, 2000 Antwerpen, Belgium;2. College of Business, University of Akron, Akron, OH, USA;3. School of Accounting and Finance, University of Vaasa, Wolffintie 34, 65200 Vaasa, Finland;4. Department of Data Science, Economics and Finance at EDHEC Business School, 24 avenue Gustave Delory, 59057 Roubaix Cedex 1, France;1. INTI International University, Malaysia;2. Centre for Australian Degree Programs, INTI International College Penang, Malaysia;3. Department of Econometrics and Business Statistics, Monash University, Australia;4. School of Economics and Finance, Massey University, New Zealand;6. Institute of Business Research, University of Economics Ho Chi Minh City;1. Faculty of Business, City University of Macau, Macau, China;2. School of Business, Macau University of Science and Technology, Macau, China
Abstract:This study establishes time–frequency networks of sovereign and bank contagion in the eurozone over the period 2009–2021. By applying discrete wavelet transformation, daily CDS premia of sovereigns and systemically important banks are decomposed into multi-horizon components to specify directed and dependence-weighted networks. Dynamic analysis shows that the network connectivity and the strength of the dependencies are significantly lower after the introduction of the European Banking Union in 2014. While the strength effect is pronounced across all time horizons, the network connectivity only reduces in the short and medium run. This provides evidence that the new regulatory framework promotes financial stability but is more effective in the short and medium horizons. The consideration of the COVID-19 pandemic as a real-life stress test confirms these findings as the strength of the dependencies keeps at significantly lower levels.
Keywords:Sovereign-bank contagion  Wavelet transformation  Financial stability  Network analysis
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