Systemic risk in the European sovereign and banking system

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 d...

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Bibliographic Details
Published in:Quantitative finance 2017-04, Vol.17 (4), p.633-656
Main Authors: Xu, Simon, In, Francis, Forbes, Catherine, Hwang, Inchang
Format: Article
Language:English
Subjects:
Banking stability
Sovereign default
Systemic risk
Tail risk
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Summary: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.
ISSN:1469-7688
1469-7696
DOI:10.1080/14697688.2016.1205212