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Proliferation of Tail Risks and Policy Responses in EU Financial Markets


Lucjan T. Orlowski


Sacred Heart University - John F. Welch College of Business

August 20, 2010


Abstract:     
This study draws attention to the proliferation of tail risks in financial markets prior to and during the course of the recent global financial crisis. It examines the level of tail risks in selected equity, interbank lending and foreign exchange markets in selected EU Member States in relation to the United States. The extent of tail risks is assessed by applying general error distribution (GED) parameterization in GARCH volatility tests of the examined variables. The empirical tests prove that tail risks were pronounced across all of the examined European financial markets throughout the crisis. They were also significant prior to the crisis outbreak. The analyzed interbank lending markets exhibited more extreme volatility outbursts than the equity and foreign exchange markets. Several countercyclical monetary and macroprudential policies aimed at abating tail risks are identified and discussed. Flexible capital adequacy and contingent capital requirements for financial institutions are advocated.

Number of Pages in PDF File: 37

Keywords: Tail Risk, Systemic Risk, Financial Crisis, EU Member States

JEL Classification: E44, G01

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Date posted: August 20, 2010  

Suggested Citation

Orlowski, Lucjan T., Proliferation of Tail Risks and Policy Responses in EU Financial Markets (August 20, 2010). Available at SSRN: http://ssrn.com/abstract=1662468 or http://dx.doi.org/10.2139/ssrn.1662468

Contact Information

Lucjan T. Orlowski (Contact Author)
Sacred Heart University - John F. Welch College of Business ( email )
5151 Park Avenue
Fairfield, CT 06825
United States
203-371-7858 (Phone)
HOME PAGE: http://www.sacredheart.edu/ltorlowski.cfm
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