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EMU-Risk Synchronisation and Financial Fragility Through the Prism of Dynamic Connectedness

Ioannis Chatziantoniou and David Gabauer
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David Gabauer: Webster Vienna Private University, Johannes Kepler University

No 2019-07, Working Papers in Economics & Finance from University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group

Abstract: This study employs dynamic connectedness as a measure of financial risk synchronisation considering government bond yields in 11 EMU member states. In particular, large values of the relevant index can be an indication of comparable levels of risk further implying that the common currency area consists of a financially sensible set of countries. By contrast, small connectedness values can be an indication of fragmentation whereupon certain countries are considered to be safer than others. The latter would be detrimental for the EMU as it fuels financial fragility, which practically stipulates that crises occur as a result of self-fulfilling market fears. The results are based on a daily dataset which spans between 1st September 2003 and 31st August 2018. Findings show that fragmentation was present at the height of the European sovereign debt crisis and that the interconnectedness has not yet reverted to its pre-2009 levels. In addition, core countries appear to transmit shocks to periphery countries although, occasionally, there are noteworthy disparities. Further investigating these disparities on a pairwise connectedness level - which helps to identify sensible pairs of countries in terms of financial risk - shows that core countries dominate this exercise, with the exception of the bilateral relation between Italy and Spain. The fact that most periphery countries of our sample are not included in these pairs raises concerns and calls for a more substantial integration.

Keywords: OCA; ERM II; EMU; Fragmentation; Fragility Hypothesis (search for similar items in EconPapers)
JEL-codes: C32 C50 F15 F33 F36 F45 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec
Date: 2019-07-16
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