Beyond Spreads: Measuring Sovereign Market Stress in the Euro Area

34 Pages Posted: 17 Oct 2018

See all articles by Carlos Garcia-de-Andoain

Carlos Garcia-de-Andoain

European Central Bank (ECB)

Manfred Kremer

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: October 15, 2018

Abstract

In this paper we propose a composite indicator that measures multi-dimensional sovereign bond market stress in the euro area as a whole and in individual euro area member states. It integrates measures of credit risk, volatility and liquidity at short-term and long-term bond maturities into a broad measure of sovereign market stress. The statistical framework builds on that of the ECB’s Composite Indicator of Systemic Stress (CISS) developed by Holló, Kremer and Lo Duca (2012), so that we call our metric the Composite Indicator of Systemic Sovereign Stress or “SovCISS”. We implement the SovCISS for eleven euro area member states and also present four options of a SovCISS for the entire monetary union. In addition, we suggest a linear decomposition of the SovCISS, singling out contributions of the different components and of the time-varying correlations across these components. Comparing develoments in the SovCISS and the CISS over the crisis period clearly illustrates the usefulness of the latter for the real-time monitoring of systemic instabilities in the financial system as a whole. Finally, an application of the country-specific SovCISS indicators to the VAR-based spillover literature suggests that stress mainly originates from a few euro area countries, and that spillover patterns vary over time.

Keywords: financial stress index, systemic risk; sovereign debt crisis, spillover index

JEL Classification: C43, E44, F45, G01, H63

Suggested Citation

Garcia-de-Andoain, Carlos and Kremer, Manfred, Beyond Spreads: Measuring Sovereign Market Stress in the Euro Area (October 15, 2018). ECB Working Paper No. 2185. Available at SSRN: https://ssrn.com/abstract=3267816

Carlos Garcia-de-Andoain (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Manfred Kremer

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 7065 (Phone)

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