An investigation of systemic stress and interdependencies within the Eurozone and Euro Area countries

Abstract

One of the most challenging issues that economists are dealing with is the investigation of the financial turmoil in Eurozone economies. Particularly, the issue of exposing the potential crisis transmission channels has attracted considerable interest.Aiming to contribute to this literature, we construct financial stress indices on a country level and explore further the potential inter-reactions between the source causes of systemic risk. The country specific index consists of a wide number of series drawn from the money, equity and bond markets, and the banking sector of each Eurozone country. A Euro Area stress index is also provided, exploring the evolution of financial conditions for this group of countries. The investigation of the potential transmission channels is implemented through a multivariate analysis and the corresponding impulse responses' dynamics. The empirical findings suggest that countries are mostly responsive to their own financial shocks, while a degree of regionalism is also evident. That is, the peripheral countries are more susceptible to their financial stress, while the same holds for the core Eurozone countries.Additionally, in contrast to common wisdom, financial conditions in Greece and Portugal do not seem to affect the rest of the Euro Area, at least in the degree that Italy and Ireland do. These results are consistent under alternative model and sample specifications. JEL Classifications: C43, C58, G01, G15

A compositional analysis of systemic risk in European financial institutions

“…In particular, MacDonald et al. ( 2015 ) have used the word “regionalism” to characterize the behavior of GIIPS economies (Greece, Ireland, Italy, Portugal, Spain), which have contributed and reacted to the spread of financial stress as a distinctive region. Furthermore, Black et al.…”

“…On the one hand, this result in line with a consolidated literature investigating the role of peripheral countries as determinants of systemic risk in Europe. In particular, MacDonald et al (2015) have used the word "regionalism" to characterize the behavior of GIIPS economies (Greece, Ireland, Italy, Portugal, Spain), which have contributed and reacted to the spread of financial stress as a distinctive region. Furthermore, Black et al (2016) have observed that "the interesting story leading into the sovereign crisis is the Italian and Spanish banks", whose marginal contribution to systemic risk in Europe has grown significantly with the GFC, also in connection with contagion concerns flowing from Greece.…”

Financial stress relationships among Euro area countries: an R-vine copula approach

“…By employing this method, any issues of mis-measurement or with the units of measurement are avoided. In FSIs literature, the variance-equal approach is the most heavily used, given its simplicity and the production of stress indices able to accurately capture market conditions and level of distress (Hakkio and Keeton, 2009, Magkonis and Tsopanakis, 2014, Apostolakis and Papadopoulos, 2014, MacDonald et al, 2015. This means that the equally weighted stress indices successfully represent the prevailing conditions in the financial markets.…”

Asset liability management and the euro crisis

“…We also investigate the relationship between German and Spanish, German and Italian, German and Austrian as well as German and Dutch government bond yields, although we will use a different approach and focus on the corresponding bond yield spreads. Using the government bond yields of Germany as a benchmark is quite common in the literature due to the economic relevance of Germany as the largest EMU economy and its safe haven status (Canarella et al , 2011; Basse, 2014; MacDonald et al , 2015).…”