Financial risk distribution in European Union
Stefania Scocchera and
Physica A: Statistical Mechanics and its Applications, 2018, vol. 505, issue C, 252-267
A methodology based on Markov chains and dynamic entropy measures is proposed for measuring and forecasting the evolution of the inequality of financial risks in the European Union (EU). The proposed methodology requires knowledge of the past evolution of sovereign credit rating for the EU member states and historical data concerning harmonized interest rates of government bonds. The methodology is applied to real data from European countries for the three rating agencies Fitch, Moody’s and Standard & Poor’s. Obtained results show that, although these rating agencies share similar view on the rating assignment process, they have a different perception of the risk when expressed in terms of basis points and this fact determines divergences on the forecasted financial inequality in the EU. The development of an open source and user friendly (i.e. we implemented also a Graphical User Interface) software (https://github.com/lstorchi/markovctheil) will permit the replication of all the results both for the actual scenario in the EU and for possible future scenarios as the Brexit.
Keywords: Financial inequality; Markov chains; Sovereign credit ratings; Credit spreads; Dynamic Theil’s entropy (search for similar items in EconPapers)
JEL-codes: C61 C63 G17 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:505:y:2018:i:c:p:252-267
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