Systemic risk spillovers in the European banking and sovereign network

Frank Betz, Nikolaus Hautsch, Tuomas Peltonen () and Melanie Schienle

No 79, Working Paper Series in Economics from Karlsruhe Institute of Technology (KIT), Department of Economics and Management

Abstract: We propose a framework for estimating time-varying systemic risk contributions that is applicable to a high-dimensional and interconnected financial system. Tail risk dependencies and systemic risk contributions are estimated using a penalized two-stage fixed-effects quantile approach, which explicitly links time-varying interconnectedness to systemic risk contributions. For the purposes of surveillance and regulation of financial systems, network dependencies in extreme risks are more relevant than simple (mean) correlations. Thus, the framework provides a tool for supervisors, reflecting the market's view of tail dependences and systemic risk contributions. The model is applied to a system of 51 large European banks and 17 sovereigns during the period from 2006 through 2013, utilizing both equity and CDS prices. We provide new evidence on how banking sector fragmentation and sovereign-bank linkages evolved over the European sovereign debt crisis, and how they are reflected in estimated network statistics and systemic risk measures. Finally, our evidence provides an indication that the fragmentation of the European financial system has peaked.

Keywords: systemic risk contribution; tail dependence; network topology; sovereignbank linkages; Value-at-Risk (search for similar items in EconPapers)
JEL-codes: C21 C51 C63 G01 G18 G32 G38 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-cba, nep-eec, nep-net and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (87)

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Related works:
Journal Article: Systemic risk spillovers in the European banking and sovereign network (2016)
Working Paper: Systemic risk spillovers in the European banking and sovereign network (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:kitwps:79

DOI: 10.5445/IR/1000051810

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