A Thermometer for Financial Instability in the Euro Area Economy and the Role of Carry Trade

23 Pages Posted: 16 Sep 2014

See all articles by Roberto Baviera

Roberto Baviera

Polytechnic University of Milan - Department of Mathematics

Davide Lebovitz

Banca Aletti - Gruppo Banco Popolare

Date Written: September 15, 2014

Abstract

The paper suggests a simple financial instability indicator for the euro area economy. It works as a discrete thermometer with three possible outcomes depending on the severity of the crisis. This indicator is based on the specific shape of the credit term structure for the two main peripheral countries in the area. The paper discusses how some key features of term structure are linked to government debt carry trade. In order to assess the performance of the proposed market-based indicator, the paper shows how the identified episodes of financial turmoil are related with the timing and the intensity of unconventional measures in the euro area.

Keywords: Financial stress index, Unconventional measures, Asset Swap, EONIA, Term structure of credit spread, Peripheral euro government bonds, Time to Structural Change, Macroprudential policy

JEL Classification: C51, E58, E65, G15, G18, H81

Suggested Citation

Baviera, Roberto and Lebovitz, Davide, A Thermometer for Financial Instability in the Euro Area Economy and the Role of Carry Trade (September 15, 2014). Available at SSRN: https://ssrn.com/abstract=2496516 or http://dx.doi.org/10.2139/ssrn.2496516

Roberto Baviera (Contact Author)

Polytechnic University of Milan - Department of Mathematics ( email )

P.zza L. da Vinci, 32
Milan, 20133
Italy

Davide Lebovitz

Banca Aletti - Gruppo Banco Popolare ( email )

Via Roncaglia, 12
Milan, 20146
Italy

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