Systemic risk in the European sovereign and banking system
Embargoed until: 2018-01-01
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We investigate the systemic risk of the European sovereign and banking system during 2008–2013. We utilize a conditional measure of systemic risk that reflects market perceptions and can be intuitively interpreted as an entity’s conditional joint probability of default, given the hypothetical default of other entities. The measure of systemic risk is applicable to high dimensions and not only incorporates individual default risk characteristics but also captures the underlying interdependent relations between sovereigns and banks in a multivariate setting. In empirical applications, our results reveal significant time variation in systemic risk spillover effects for the sovereign and banking system. We find that systemic risk is mainly driven by risk premiums coupled with a steady increase in physical default risk.
Copyright 2016 Taylor & Francis (Routledge). This is an Accepted Manuscript of an article published by Taylor & Francis in Quantitative Finance on 18 Jul 2016, available online: http://www.tandfonline.com/10.1080/14697688.2016.1205212.
Banking, Finance and Investment not elsewhere classified