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Within and between systemic country risk. Theory and evidence from the sovereign crisis in Europe

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  • Baglioni, Angelo
  • Cherubini, Umberto

Abstract

We propose a hierarchical Marshall–Olkin model of countrywide systemic risk. At the lower level, we model the systemic risk of a crisis within the banking system (that we call “within” systemic risk) and at the higher level we model the probability of a joint default of the banking system and the public sector (that we call “between” systemic risk). We apply the model to four countries of Northern Europe and four of Southern Europe. In Northern Europe, Germany ranks third for soundness of the banking system but first for country safety. The opposite findings are obtained for Netherlands. In Southern Europe, the Italian banking system ranks first for soundness, quite above Spain, while Italy is aligned with Spain for countrywide risk. Differences in default time correlations between the banking and the public sectors explain these findings.

Suggested Citation

  • Baglioni, Angelo & Cherubini, Umberto, 2013. "Within and between systemic country risk. Theory and evidence from the sovereign crisis in Europe," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1581-1597.
  • Handle: RePEc:eee:dyncon:v:37:y:2013:i:8:p:1581-1597
    DOI: 10.1016/j.jedc.2013.02.005
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    References listed on IDEAS

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    Cited by:

    1. Weiß, Gregor N.F. & Scheffer, Marcus, 2015. "Mixture pair-copula-constructions," Journal of Banking & Finance, Elsevier, vol. 54(C), pages 175-191.
    2. Umberto Cherubini & Sabrina Mulinacci, 2015. "Systemic Risk with Exchangeable Contagion: Application to the European Banking System," Papers 1502.01918, arXiv.org.
    3. Changki Kim & Yangho Choi & Woojoo Lee & Jae Youn Ahn, 2013. "Analyzing Herd Behavior in Global Stock Markets: An Intercontinental Comparison," Papers 1308.3966, arXiv.org.
    4. Sabrina Mulinacci, 2017. "A systemic shock model for too big to fail financial institutions," Papers 1704.02160, arXiv.org, revised Apr 2017.
    5. repec:eee:ejores:v:279:y:2019:i:3:p:1053-1064 is not listed on IDEAS
    6. repec:gam:jecnmx:v:5:y:2017:i:2:p:23-:d:100926 is not listed on IDEAS

    More about this item

    Keywords

    Marshall–Olkin distribution; Copula functions; Systemic risk; Financial crisis; Country risk; Sovereign default;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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