Sovereign Risk Zones in Europe During and After the Debt Crisis

30 Pages Posted: 8 Aug 2018

See all articles by Veni Arakelian

Veni Arakelian

Council of Economic Advisors, Ministry of Finance, Hellenic Republic; UCL Centre for Blockchain Technologies

Petros Dellaportas

Athens University of Economics and Business

Roberto Savona

University of Brescia - Department of Economics and Management

Marika Vezzoli

University of Brescia

Date Written: July 20, 2018

Abstract

We employ a machine learning approach to build a European sovereign risk stratification using macroeconomic fundamentals and contagion measures, proxied by copula-based credit default swap (CDS) dependencies over the period 2008-2017, for France, Germany, Greece, Ireland, Italy, Portugal, and Spain. By adopting a recursive partitioning strategy we detect specific risk zones varying from safe to high risk based on key predictors, and we construct their specification by assigning specific risk thresholds. While key macroeconomic fundamentals such as Debt/GDP and the unemployment rate remained the same and maintained the same risk thresholds during (2008-2013) and after (2013-2017) the crisis, the CDS spreads contagion dropped significantly over the post-crisis years, lowering the corresponding risk thresholds. We estimate an impact on CDS spreads approximately of -150 basis points in the period 2013-2017 due to contagion mitigation.

Keywords: contagion, copula, credit default swaps, machine learning, regression trees, systemic risk

JEL Classification: C11, G01, G10

Suggested Citation

Arakelian, Veni and Dellaportas, Petros and Savona, Roberto and Vezzoli, Marika, Sovereign Risk Zones in Europe During and After the Debt Crisis (July 20, 2018). Available at SSRN: https://ssrn.com/abstract=3217047 or http://dx.doi.org/10.2139/ssrn.3217047

Veni Arakelian

Council of Economic Advisors, Ministry of Finance, Hellenic Republic ( email )

5-7 Nikis str
Athens, 10180
Greece

UCL Centre for Blockchain Technologies ( email )

Malet Place
London, London WC1E 6BT
United Kingdom

Petros Dellaportas

Athens University of Economics and Business ( email )

76 Patission Street
Athens, 104 34
Greece

Roberto Savona (Contact Author)

University of Brescia - Department of Economics and Management ( email )

Contrada Santa Chiara, 50
BRESCIA, BS 25122
Italy

Marika Vezzoli

University of Brescia ( email )

Piazza del Mercato, 15
25122 Brescia
Italy

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