The contributions to systemic stress of financial interactions between the US and Europe

Understanding the connectivity of international financial markets is critical to understanding the origination and propagation of financial crises. This study investigates the contribution of US and European exchange rate interactions to overall stress in the US financial system from 1992 to 2013. The impacts of these interactions are assessed using a financial stress index that aggregates measures of national and international stresses. There are three main findings for the sample period. First, we find that European influences on US financial stress have increased. Second, observing several structural breaks with changing correlation and Granger causality patterns, we find that the euro and the British pound have contributed varying levels of stress. Third, we find that stress in US markets tends to spill over into European markets, while the reverse influences are of lesser importance. These findings have important implications for supervisors in international markets. Understanding the amplifying or attenuating feedback effects from international connectivity provides valuable insight into the development of macroprudential policies.