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Transmission channels of systemic risk and contagion in the European financial network

Transmission channels of systemic risk and contagion in the European financial network
Transmission channels of systemic risk and contagion in the European financial network
We investigate systemic risk and how financial contagion propagates within the euro area banking system by employing the Maximum Entropy method. The study captures multiple snapshots of a dynamic financial network and uses counterfactual simulations to propagate shocks emerging from three sources of systemic risk: interbank, asset price, and sovereign credit risk markets. As conditions deteriorate, these channels trigger severe direct and indirect losses and cascades of defaults, whilst the dominance of the sovereign credit risk channel amplifies, as the primary source of financial contagion in the banking network. Systemic risk within the northern euro area banking system is less apparent, while the southern euro area banking system is more prone and susceptible to bank failures provoked by financial contagion. By modelling the contagion path the results demonstrate that the euro area banking system insists to be markedly vulnerable and conducive to systemic risks.
Systemic risk, Maximum entropy, Interbank market, Financial network, Sovereign credit risk, European banks
0378-4266
S36-S52
Paltalidis, Nikos
21f9fcb7-d63e-4ce0-ba01-d312593e49ef
Gounopoulos, Dimitrios
804d4ac1-e8e3-4489-9508-f200dd77c755
Kizys, Renatas
9d3a6c5f-075a-44f9-a1de-32315b821978
Koutelidakis, Yannis
2154fe5f-ad47-4f9a-8645-7fb1eaf8d528
Paltalidis, Nikos
21f9fcb7-d63e-4ce0-ba01-d312593e49ef
Gounopoulos, Dimitrios
804d4ac1-e8e3-4489-9508-f200dd77c755
Kizys, Renatas
9d3a6c5f-075a-44f9-a1de-32315b821978
Koutelidakis, Yannis
2154fe5f-ad47-4f9a-8645-7fb1eaf8d528

Paltalidis, Nikos, Gounopoulos, Dimitrios, Kizys, Renatas and Koutelidakis, Yannis (2015) Transmission channels of systemic risk and contagion in the European financial network. Journal of Banking & Finance, 61 (Supplement 1), S36-S52. (doi:10.1016/j.jbankfin.2015.03.021).

Record type: Article

Abstract

We investigate systemic risk and how financial contagion propagates within the euro area banking system by employing the Maximum Entropy method. The study captures multiple snapshots of a dynamic financial network and uses counterfactual simulations to propagate shocks emerging from three sources of systemic risk: interbank, asset price, and sovereign credit risk markets. As conditions deteriorate, these channels trigger severe direct and indirect losses and cascades of defaults, whilst the dominance of the sovereign credit risk channel amplifies, as the primary source of financial contagion in the banking network. Systemic risk within the northern euro area banking system is less apparent, while the southern euro area banking system is more prone and susceptible to bank failures provoked by financial contagion. By modelling the contagion path the results demonstrate that the euro area banking system insists to be markedly vulnerable and conducive to systemic risks.

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PALTALIDIS_2015_cright_JBF_Transmission_Channels_of_Systemic_Risk_and_Contagion - Accepted Manuscript
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Accepted/In Press date: 12 March 2015
e-pub ahead of print date: 28 April 2015
Published date: December 2015
Keywords: Systemic risk, Maximum entropy, Interbank market, Financial network, Sovereign credit risk, European banks

Identifiers

Local EPrints ID: 434026
URI: http://eprints.soton.ac.uk/id/eprint/434026
ISSN: 0378-4266
PURE UUID: 108b42e0-205b-4cb6-9713-bad920fa6c3c
ORCID for Renatas Kizys: ORCID iD orcid.org/0000-0001-9104-1809

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Date deposited: 11 Sep 2019 16:30
Last modified: 09 Jan 2022 04:07

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Contributors

Author: Nikos Paltalidis
Author: Dimitrios Gounopoulos
Author: Renatas Kizys ORCID iD
Author: Yannis Koutelidakis

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