Systemic risk in the European sovereign and banking system

Simon Xu, Francis In, Catherine Forbes, Inchang Hwang

Research output: Contribution to journalArticleResearchpeer-review

4 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)633-656
Number of pages24
JournalQuantitative Finance
Volume17
Issue number4
DOIs
Publication statusPublished - 3 Apr 2017

Keywords

  • Banking stability
  • Sovereign default
  • Systemic risk
  • Tail risk

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