Systemic Risk Spillovers in the European Banking and Sovereign Network

33 Pages Posted: 4 Oct 2014

See all articles by Frank Betz

Frank Betz

European Union - European Investment Bank

Nikolaus Hautsch

University of Vienna - Department of Statistics and Operations Research; Center for Financial Studies (CFS)

Tuomas A. Peltonen

European Central Bank (ECB)

Melanie Schienle

Karlsruhe Institute of Technology (KIT)

Date Written: September 10, 2014

Abstract

We propose a framework for estimating network-driven time-varying systemic risk contributions that is applicable to a high-dimensional financial system. Tail risk dependencies and contributions are estimated based on a penalized two-stage fixed-effects quantile approach, which explicitly links bank interconnectedness to systemic risk contributions. The framework is applied to a system of 51 large European banks and 17 sovereigns through the period 2006 to 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 it is reflected in network statistics and systemic risk measures. Illustrating the usefulness of the framework as a monitoring tool, we provide indication for the fragmentation of the European financial system having peaked and that recovery has started.

Keywords: systemic risk contribution, tail dependence, network topology, sovereignbank linkages, Value-at-Risk

JEL Classification: G01, G18, G32, G38, C21, C51, C63

Suggested Citation

Betz, Frank and Hautsch, Nikolaus and Peltonen, Tuomas A. and Schienle, Melanie, Systemic Risk Spillovers in the European Banking and Sovereign Network (September 10, 2014). CFS Working Paper, No. 467. Available at SSRN: https://ssrn.com/abstract=2504400 or http://dx.doi.org/10.2139/ssrn.2504400

Frank Betz

European Union - European Investment Bank ( email )

98-100 Boulevard Konrad Adenauer
L-2950
Luxembourg

Nikolaus Hautsch (Contact Author)

University of Vienna - Department of Statistics and Operations Research ( email )

Oskar-Morgenstern-Platz 1
Vienna, A-1090
Austria

Center for Financial Studies (CFS) ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Tuomas A. Peltonen

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Melanie Schienle

Karlsruhe Institute of Technology (KIT) ( email )

Institute of Economics (ECON)
Karlsruhe
Germany

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