Proliferation of risk and policy responses in the EU financial markets
AbstractSummary for non-specialistsThis study draws attention to the proliferation of tail risks in financial markets prior to and during the course of the recent global financial crisis. It examines the level of tail risks in selected equity, interbank lending and foreign exchange markets in selected EU Member States in relation to the United States. The extent of tail risks is assessed by applying general error distribution (GED) parameterization in GARCH volatility tests of the examined variables. The empirical tests prove that tail risks were pronounced across all of the examined European financial markets throughout the crisis. They were also significant prior to the crisis outbreak. The analyzed interbank lending markets exhibited more extreme volatility outbursts than the equity and foreign exchange markets. Several countercyclical monetary and macroprudential policies aimed at abating tail risks are identified and discussed. Flexible capital adequacy and contingent capital requirements for financial institutions are advocated.
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Bibliographic InfoPaper provided by Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 416.
Length: 31 pages
Date of creation: Jul 2010
Date of revision:
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Global financial crisis equity markets foreign exchange markets monetary policies macroprudential policies Orlowski;
Find related papers by JEL classification:
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G01 - Financial Economics - - General - - - Financial Crises
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-08-28 (All new papers)
- NEP-BAN-2010-08-28 (Banking)
- NEP-CBA-2010-08-28 (Central Banking)
- NEP-EEC-2010-08-28 (European Economics)
- NEP-MAC-2010-08-28 (Macroeconomics)
- NEP-MON-2010-08-28 (Monetary Economics)
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