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Proliferation of risk and policy responses in the EU financial markets

Author

Listed:
  • Lucjan T. Orlowski

Abstract

Summary 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.

Suggested Citation

  • Lucjan T. Orlowski, 2010. "Proliferation of risk and policy responses in the EU financial markets," European Economy - Economic Papers 2008 - 2015 416, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  • Handle: RePEc:euf:ecopap:0416
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    File URL: http://ec.europa.eu/economy_finance/publications/economic_paper/2010/pdf/ecp416_en.pdf
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    References listed on IDEAS

    as
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    5. repec:wsi:jicepx:v:01:y:2010:i:02:n:s1793993310000111 is not listed on IDEAS
    6. Rob Gregory & Christian Henn & Brad Mcdonald & Mika Saito, 2010. "Trade And The Crisis: Protect Or Recover," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 1(02), pages 165-181.
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    More about this item

    Keywords

    Global financial crisis equity markets foreign exchange markets monetary policies macroprudential policies Orlowski;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises

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