Spillovers in risk of financial institutions

ABSTRACT

We analyse the total and directional spillovers across a set of financial institution systemic risk state variables: credit risk, real estate market risk, interest rate risk, interbank liquidity risk and overall market risk. We examine the response of the spillover levels, within the set of systemic risk state variables, to a number of events in the financial markets and to initiatives undertaken by the European Central Bank and the Bank of England. The relationship between the time-varying spillovers and policy-related events is analysed using a multiple structural break estimation procedure and looking at the temporary increases in the spillover indices. Our sample includes five European Union countries: core countries France and Germany, periphery countries Spain and Italy, and a reference country, the UK. We show that national stock markets and real estate markets have a leading role in shock transmission across selected state variables. However, the role of the other variables reverses over the course of the crisis. We document that the total and net spillover indices react strongly to the events relating to financial assistance packages in Europe.

KEYWORDS:

• Financial systemic risk state variables
• financial crisis
• spillover effects
• credit default swaps
• real estate risk

JEL CLASSIFICATIONS:

• G01
• G15
• G20

Acknowledgments

The authors are grateful for useful comments from two anonymous referees, Chris Adcock, Abhinav Anand, Davide Avino, Thomas Conlon, Gregory Connor, Mark Hallam, Andreas Hoepner, Andrew Vivian, participants at the Workshop on Recent Developments in Econometrics and Financial Data Science 2017 and the Annual Conference of the Irish Economic Association 2016.

Disclosure statement

No potential conflict of interest was reported by the authors.

ORCID

Anita Suurlaht  http://orcid.org/0000-0002-5779-656X

Additional information

Funding

This research was supported by the Science Foundation of Ireland grants 16/SPP/F3347 and 17/SP/5447.