Essays on the macroeconomic determinants of sovereign and systemic risk

This thesis investigates the macroeconomic determinants of sovereign- and systemic risk. In chapter 1, we investigate the lead-lag relationship between weekly sovereign-bond-yield changes and stock market returns for eight European countries, and how it changed during the period 2008-2018. We use a Markov Switching Granger-causality method that determines reversals of causality endogenously. In all countries, changes were often made in the direction of the Granger causality between the two markets that coincided with global and idiosyncratic economic events. Stock returns led changes in sovereign bond yields in all countries, particularly during the financial and the euro-area crisis. Changes in sovereign bond yields occasionally led to stock returns in France, Spain and Portugal. Chapter 2 quantifies the effects of macroeconomic variables on various market-based systemic risk measures in 24 European banks over the 2008-2019 period. In a first step, I measure daily systemic risk for banks based on ∆CoVaR, MES, and SRISK framework and examine the contributions of individual banks to aggregate systemic risk during specific stress events. Systemic risk in European banks has risen in the wake of the global financial crisis and the Brexit referendum result. In a second step, I investigate how macroeconomic conditions affect systemic risk in the short and long-run. I find that three systemic risk measures have a long-run stable relationship with EU industrial pro-duction, EU inflation, Euribor, and US equity market volatility, but some variables have opposite effects in the short and long-run. Chapter 3 examines how domestic economic policy uncertainty (EPU) affects sovereign credit risk, measured by the sovereign credit default swap (CDS) spreads through exchange-rate volatility, sovereign bond yields, and consumer confidence index. I use monthly data from 2009 to 2020, for 10 countries and employ a panel vector autoregression (PVAR) using a fixed-effects estimator to estimate the real effects of domestic uncertainty shocks on sovereign credit risk, exchange-rate risk, sovereign bond yields (as a market risk.) and the consumer confidence index (as a driver of economic activity). I find sovereign credit risk is influenced the most by economic policy uncertainty. The effect of EPU on sovereign bond yields and the consumer confidence index appears to be less important