Assessing the impact of policy and regulation interventions in European sovereign credit risk networks: What worked best?

Abstract

We study the impact of changes in regulations and policy interventions on systemic risk among European sovereign entities measured as volatility spillovers in credit risk markets. With our unique intraday CDS dataset, the effectiveness of closely subsequent events can be assessed, and interventions with significant changes in network cross-effects can be discerned by appropriate bootstrap confidence intervals. We show that it was mainly regulatory changes such as the ban of trading naked sovereign CDS in 2012 as well as the new ISDA regulations in 2014 which were most effective in reducing systemic risk. In comparison, the effect of policy interventions was minor and generally not sustainable. Their impact was only significant when they were implemented for the first time and targeted more than one country. For the volatility spillover channels, we generally find balanced networks with no fragmentation over time.