Fragmentation in European Financial Markets: Measures, Determinants, and Policy Solutions
This paper measures fragmentation in four European financial markets (interbank, sovereign debt, equity, and the CDS market for financial institutions) and develops a new measure of global fragmentation using these markets as inputs. We find that, during the recent crisis, fragmentation in the interbank market has been, on average, higher in the peripheral countries than in the core ones and it has increased particularly during periods of financial stress. Among the most significant factors that contributed to the high fragmentation levels observed are counterparty risk and financing costs (overall factors), and country-specific factors such as banking sector openness, the debt to-GDP and the relative size of the financial sector. We also study the short-run effect of the ECB programmes and announcements and find a significant decrease in the daily levels of fragmentation immediately after the implementation of the SMP, 3Y-LTROs and the second CBPP of the ECB as well as key announcements relative to banking union and the OMT. These helped restore investors confidence in the euro and confirmed the ECB s support for tackling the challenges of the European sovereign debt crisis. Nevertheless, additional measures seem to be necessary to guarantee a new process of re-integration and thus a more stable European banking sector.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Dimitris A. Georgoutsos & Petros Migiakis, 2010. "European sovereign bond spreads: monetary unification, market conditions and financial integration," Working Papers 115, Bank of Greece.
- Xavier Freixas & Cornelia Holthausen, 2001.
"Interbank market integration under asymmetric information,"
Economics Working Papers
579, Department of Economics and Business, Universitat Pompeu Fabra.
- Xavier Freixas, 2005. "Interbank Market Integration under Asymmetric Information," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 459-490.
- Freixas, Xavier & Holthausen, Cornelia, 2001. "Interbank market integration under asymmetric information," Working Paper Series 0074, European Central Bank.
- Freixas, X. & Holthausen, C., 2001. "Interbank Market Integration under Asymmetric Information," Papers 74, Quebec a Montreal - Recherche en gestion.
- Niccolò Battistini & Marco Pagano & Saverio Simonelli, 2013. "Systemic Risk and Home Bias in the Euro Area," European Economy - Economic Papers 494, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
- Ã“scar Arce & Sergio Mayordomo & Juan Ignacio PeÃ±a, 2012.
"Credit-Risk Valuation in the Sovereign CDS and Bonds Markets: Evidence from the Euro Area Crisis,"
Faculty Working Papers
22/12, School of Economics and Business Administration, University of Navarra.
- Arce, Oscar & Mayordomo, Sergio & Peña, Juan Ignacio, 2013. "Credit-risk valuation in the sovereign CDS and bonds markets: Evidence from the euro area crisis," Journal of International Money and Finance, Elsevier, vol. 35(C), pages 124-145.
- Philipp Hartmann & Angela Maddaloni & Simone Manganelli, 2003.
"The Euro-area Financial System: Structure, Integration, and Policy Initiatives,"
Oxford Review of Economic Policy,
Oxford University Press, vol. 19(1), pages 180-213.
- Manganelli, Simone & Hartmann, Philipp & Maddaloni, Angela, 2003. "The euro area financial system: structure, integration and policy initiatives," Working Paper Series 0230, European Central Bank.
- Francis X. Diebold & Kamil Yilmaz, 2010.
"Better to Give than to Receive: Predictive Directional Measurement of Volatility Spillovers,"
Koç University-TUSIAD Economic Research Forum Working Papers
1001, Koc University-TUSIAD Economic Research Forum, revised Mar 2010.
- Diebold, Francis X. & Yilmaz, Kamil, 2012. "Better to give than to receive: Predictive directional measurement of volatility spillovers," International Journal of Forecasting, Elsevier, vol. 28(1), pages 57-66.
When requesting a correction, please mention this item's handle: RePEc:bbv:wpaper:1322. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (OSCAR DE LAS PENAS SANCHEZ-CARO)
If references are entirely missing, you can add them using this form.