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The Time-Spatial Dimension of Eurozone Banking Systemic Risk

Author

Listed:
  • Matteo Foglia

    () (Department of Economics, “G.d’Annunzio” University of Chieti-Pescara, Viale Pindaro n. 42, 65127 Pescara, Italy)

  • Eliana Angelini

    () (Department of Economics, “G.d’Annunzio” University of Chieti-Pescara, Viale Pindaro n. 42, 65127 Pescara, Italy)

Abstract

In this paper, we measure the systemic risk with a novel methodology, based on a “spatial-temporal” approach. We propose a new bank systemic risk measure to consider the two components of systemic risk: cross-sectional and time dimension. The aim is to highlight the “time-space dynamics” of contagion, i.e., if the CDS spread of bank i depends on the CDS spread of other banks. To do this, we use an advanced spatial econometrics design with a time-varying spatial dependence that can be interpreted as an index of the degree of cross-sectional spillovers. The findings highlight that the Eurozone banks have strong spatial dependence in the evolution of CDS spread, namely the contagion effect is present and persistent. Moreover, we analyse the role of the European Central Bank in managing contagion risk. We find that monetary policy has been effective in reducing systemic risk. However, the results show that systemic risk does not imply a policy intervention, highlighting how financial stability policy is not yet an objective.

Suggested Citation

  • Matteo Foglia & Eliana Angelini, 2019. "The Time-Spatial Dimension of Eurozone Banking Systemic Risk," Risks, MDPI, Open Access Journal, vol. 7(3), pages 1-25, July.
  • Handle: RePEc:gam:jrisks:v:7:y:2019:i:3:p:75-:d:246287
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    References listed on IDEAS

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    More about this item

    Keywords

    spatial contagion; systemic risk measure; bank risk-taking; macroprudential policy;

    JEL classification:

    • C - Mathematical and Quantitative Methods
    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting
    • K2 - Law and Economics - - Regulation and Business Law

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