Spillover from Italian Political Risk to the Italian and the Euro Area Banking Sector

Abstract

We examine if the political risk from the 2018 Italian election has caused a spillover effect from Italian sovereign risk to the banking sector within Italy and the Euro Area. We apply a panel regression to find evidence of correlation between CDS spread of Italian sovereign CDS and Euro Area banks CDS spreads. We find that there is a strong spillover from the Italian sovereign CDS to both the Italian and the Euro Area banks CDS spread. We conclude that the spillover has financially and statistically affected the banking sector in Italy and in the Euro Area negatively.