Systemic risk in European sovereign debt markets: A CoVaR-copula approach

• We studied systemic risk in European sovereign debt markets.
• We characterized and computed CoVaR using copulas.
• Before the sovereign debt crisis, sovereign debt markets were all coupled.
• After the debt crisis, systemic risk decreased for crisis countries.
• Greek systemic increased for crisis countries and decreased for other countries.

We studied systemic risk in European sovereign debt markets before and after the onset of the Greek debt crisis, taking the conditional value-at-risk (CoVaR) as a systemic risk measure, characterized and computed using copulas. We found that, before the debt crisis, sovereign debt markets were all coupled and systemic risk was similar for all countries. However, with the onset of the Greek crisis, debt markets decoupled and the systemic risk of the countries in crisis (excepting Spain) for the European debt market as a whole decreased, whereas that of the non-crisis countries increased to a small degree. The systemic risk of the Greek debt market for other countries in difficulties increased, especially for Portugal where systemic risk tripled after the onset of the crisis, whereas the systemic impact on the non-crisis countries decreased.