Spillover Effects between Greece and Cyprus: A DCC Model on the Interdependence of Small Economies

Investment Management and Financial Innovations, 17(4), 121-135. doi:10.21511/imfi.17(4).2020.12

26 Pages Posted: 3 Dec 2020 Last revised: 4 Dec 2020

See all articles by Aristeidis Samitas

Aristeidis Samitas

University of the Aegean

Elias Kampouris

University of the Aegean

Stathis Polyzos

Zayed University

Anastasia Spyridou

Gdańsk University of Technology

Date Written: November 24, 2020

Abstract

This paper discusses the volatility spillovers between the Greek Debt crisis and the Cypriot financial crisis. Cyprus was in the spotlight of financial markets due to significant problems stemming from the banking sector, which were dealt with by EU regulators with a bail-in on bank deposits. The current analysis aims to shed light on the reasons behind the implementation of this novel approach to bank distress. The study uses a Dynamic Conditional Correlation model on the returns of the stock markets of the two countries, which shows strong spillover effects during the period leading up to the 2013 Cypriot crisis, but a significant decrease of these effects from then on. The results confirm the close interdependence of the Greek and Cypriot economies before 2013 but also show that this interdependence was limited from that point onwards. This would indicate that since the risk of contagion to the Eurozone had diminished, regulators were able to test the bail-in solution in Cyprus in 2015. The current work contributes to the discussion on the interdependence of European economies. The paper’s findings can also be applied to other emerging European economies.

Keywords: Greek Debt crisis, Cypriot Financial crisis, contagion,DCC model, bail-in, bank distress

JEL Classification: G01, G15, F37

Suggested Citation

Samitas, Aristeidis and Kampouris, Elias and Polyzos, Stathis and Spyridou, Anastasia, Spillover Effects between Greece and Cyprus: A DCC Model on the Interdependence of Small Economies (November 24, 2020). Investment Management and Financial Innovations, 17(4), 121-135. doi:10.21511/imfi.17(4).2020.12, Available at SSRN: https://ssrn.com/abstract=3737253 or http://dx.doi.org/10.2139/ssrn.3737253

Aristeidis Samitas

University of the Aegean ( email )

8 Michalon str.
Chios
Greece

Elias Kampouris

University of the Aegean ( email )

8 Michalon str.
Chios
Greece

Stathis Polyzos (Contact Author)

Zayed University ( email )

Zayed University
P.O. Box 144534
Abu Dhabi
United Arab Emirates

Anastasia Spyridou

Gdańsk University of Technology ( email )

Narutowicza 11/12
Gdansk, 80-233
Poland

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