Financial Stress Relationships Among Euro Area Countries: An R-Vine Copula Approach

The European Journal of Finance, Forthcoming

Posted: 3 Jan 2018

See all articles by Andreas Tsopanakis

Andreas Tsopanakis

Cardiff University - Cardiff Business School

Meilan Yan

Hull University Business School (HUBS)

Dalu Zhang

University of Salford - Salford Business School

Date Written: September 30, 2017

Abstract

One of the biggest challenges of keeping Euro area financial stability is the negative comovement between the vulnerability of public finance, the financial sector, security markets stresses as well as economic growth, especially in peripheral economies. This paper utilities a ARMA-GARCH based R-vine copula method to explore tail dependence between the Financial Stress Indices of eleven euro area countries with an aim of understanding how financial stress are interacting with each other. We find larger economies in the Euro area tend to have closer upper tail dependence in terms of positive shocks, while smaller economies tend to have closer lower tail dependence with respect to negative shocks. The estimated R-vine shows Spain, Italy, France and Belgium are the most inter-connected nodes which underlying they might be more efficient targets to treat in order to achieve a quicker stabilizing. Our results relate to the fact that Eurozone is not a unified policy making area, therefore, it needs to follow divergent policies for taming the effects of financial instability to different regions or groups of economies that are more interconnected.

Keywords: Financial stress, FSI, Euro area, GARCH, Vine copula, regular vine

JEL Classification: E44, F47, G01

Suggested Citation

Tsopanakis, Andreas and Yan, Meilan and Zhang, Dalu, Financial Stress Relationships Among Euro Area Countries: An R-Vine Copula Approach (September 30, 2017). The European Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3093645

Andreas Tsopanakis (Contact Author)

Cardiff University - Cardiff Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom

Meilan Yan

Hull University Business School (HUBS) ( email )

Hull, HU6 7RX
United Kingdom

Dalu Zhang

University of Salford - Salford Business School ( email )

Salford, Greater Manchester M5 4WT
United Kingdom

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