European financial crisis and bank productivity: evidence from Eastern European Countries

The paper examines the productivity levels of the largest banks operating in the Eastern European countries over the period of the ongoing European financial crisis. Specifically, the analysis covers the periods of U.S. subprime crisis, the global financial crisis and the sovereign debt crisis. By adopting a fully nonparametric framework, it provides a probabilistic version of a directional input-oriented Malmquist productivity index alongside with its main decomposition. The results from the analysis suggest that banks have faced a deterioration of their productivity levels between the examined periods. It is evident that during the initiation of European sovereign debt crisis, the banks have weakened their ability to utilize efficiently their inputs of production and their ability to realize scale economies.     

Sovereign bond market dependencies and crisis transmission around the eurozone debt crisis: a dynamic copula approach

We examine the dependency between the European government bond markets around the recent sovereign debt crisis. A dynamic copula approach is used to model the time-varying dependence structure of those government bond markets, evaluate the nature and strength of their dependencies over time, and gauge the transmission of the crisis shocks. Our results can be summarized as follows: i) the eurozone sovereign bond markets under consideration have a significant and positive dependence with the Greek and the EMU benchmark sovereign bond markets; ii) the dynamic-BB7 copula function best describes the dependence structure between these sovereign bond markets and provides evidence of asymmetric tail dependence; iii) the conditional probability of crisis transmission from Greece to other eurozone countries is higher than the other way around; and iv) Greece is the most vulnerable country when the eurozone entered into the sovereign debt crisis.     

Price convergence in the European Union – What has changed?

This paper investigates price convergence in European Union countries using disaggregated price level indices in the period 1999–2016. Our results show that prices of both tradable and nontradable goods had a significantly lower dispersion in 2016 than in 1999. The convergence was faster in the case of countries with price level below the average, which can be interpreted as catching-up. However, further analysis shows that most prices converged only up to 2008. While prices of transport equipment continue to converge across the European Union, several durable consumption categories show price divergence after 2008. We attribute this to the drop in international trade of durable products due to increasing inflation and exchange rates volatility following the global financial crisis. From the monetary policy perspective, the existing price-level gaps, shown in our study, may pose a risk of higher inflation, especially in catching-up economies.     

Determinants of sovereign bond yield spreads in the EMU: An optimal currency area perspective

In the light of the recent financial crisis, we take a panel cointegration approach that allows for structural breaks to the analysis of the determinants of sovereign bond yield spreads in nine economies of the European Monetary Union. We find evidence for a level break in the cointegrating relationship. Moreover, results show that (i) fiscal imbalances – namely expected government debt-to-GDP differentials – are the main long-run drivers of sovereign spreads; (ii) liquidity risks and cumulated inflation differentials have non-negligible weights; but (iii) all conclusions are ultimately connected to whether or not the sample of countries is composed of members of an Optimal Currency Area (OCA). In particular, we establish (i) that results are overall driven by those countries not passing the OCA test; and (ii) that investors closely monitor and severely punish the deterioration of expected debt positions of those economies exhibiting significant gaps in competitiveness.     

中国资本账户开放进程中跨境证券投资对国内金融市场的影响*

随着中国资本项目开放进程的推进,跨境证券投资对国内金融市场的冲击日益增强。在此背景下,本文首先通过构建考虑了资本市场收益率以及有管理浮动汇率制度的IS LM BP模型对跨境证券投资与中国国内金融市场的相互影响机理进行了理论探究,并基于中国2005年7月—2016年8月的月度数据,运用马尔科夫区制转移向量自回归模型对中国资本账户开放进程中跨境证券投资与人民币汇率、股票市场收益率、短期利率的联动关系进行了实证分析。研究结果表明：第一,四者的关联性存在明显的区制特征,区制1主要包括次贷危机时期（2007—2008年）、欧债危机时期（2010—2012年）以及后金融危机时期（2015—2016年）,经济呈现“股票市场收益率较低、跨境证券投资较少、短期利率较高、金融市场波动性大”的状态;区制2主要包括次贷危机前夕（2005—2006年）、次贷危机后的量化宽松时期（2009—2010年）以及欧债危机后的调整期（2013—2014年）,经济呈现“股票市场收益率较高、跨境证券投资较多、短期利率较低、金融市场波动性小”的状态。第二,当处于资本市场化进程较快、金融市场波动性较大的区制阶段（区制1）时,跨境证券投资与国内金融市场的联动关系更加明显。本文研究结论对于我国进一步开放资本市场具有借鉴价值和政策启示。     

Evaluating sovereign risk spillovers on domestic banks during the European debt crisis

Using a Markov-switching model with time-varying probabilities, spillovers from sovereign to domestic bank CDS spreads during the European debt crisis for a set of 14 European countries and 30 European banks are investigated. Our model is able to capture how the increased sovereign risk observed between 2010 and 2013 throughout Europe has impacted i) the probability that banks fall into a crisis regime and ii) the probability that banks stay in the crisis regime. The latter state is characterized by a high volatility and large positive returns of CDS spreads. Different regime-dependent indicators have been computed to assess heterogeneity within the region. The evidence indicates that the intensification of sovereign risk observed during the European debt crisis has positively and significantly driven the regime shifts in volatility of the bank CDS spreads due to increased risk aversion. The results show that the increase in sovereign credit risk seems to have generated second-round effects for some banks that have experienced a deterioration in their funding conditions due to a rise in the domestic sovereign default risk. Overall, our results suggest that sovereign CDS spreads can be considered good forewarning indicators for predicting the evolution of bank CDS spreads. We also find that the effects differ depending on the country and the financial institution. This result suggests that banks are heterogeneously exposed to sovereign credit risk within the same country. One argument relates to the size of these financial institutions and the domestic exposure to sovereign debt.     

Fundamentals and Sovereign Risk of Emerging Markets

We empirically assess the relative importance of various economic fundamentals in accounting for the sovereign credit default swap (CDS) spreads of emerging markets during 2004–2012, which encompasses the global financial crisis of 2008–2009. Inflation, state fragility, external debt and commodity terms of trade volatility were positively associated, while trade openness and a more favourable fiscal balance/GDP ratio were negatively associated with sovereign CDS spreads. Yet the relative importance of economic fundamentals in the pricing of sovereign risk varies over time. The key factors are trade openness and state fragility in the pre‐crisis period, the external debt/GDP ratio and inflation in the crisis period, and inflation and the public debt/GDP ratio in the post‐crisis period. Asian countries enjoy lower sovereign spreads than Latin American countries, and this gap widened during and after the crisis. Trade openness was the biggest factor behind Asia's lower sovereign spreads before the crisis, and inflation during and after the crisis. The results imply that external factors were paramount in pricing sovereign risk prior to the crisis, but internal factors associated with the capacity to adjust to adverse shocks gained prominence during and after the crisis.     

Sovereign credit ratings in the European Union: A model-based fiscal analysis

We present a model-based measure of sovereign credit ratings derived solely from the fiscal position of a country: a forecast of its future debt liabilities, and its potential to use fiscal policy to repay these. We use this measure to calculate credit ratings for 14 European countries over the period 1995–2012. This measure identifies a European sovereign debt crisis almost two years before the official ratings of the credit rating agencies.     

Backtesting expected shortfall: evidence from European securitized real estate

Events such as the European sovereign debt crisis, terrorism and Brexit cause more uncertainty and volatility in capital markets. This encourages us to use both conditional and unconditional forecasts (backtests) for expected shortfall (ES) in 8 indices of listed European real estate securities and Real estate investment trusts (REITs). Using the method proposed by Du and Escanciano, we find that ES is generally superior to Value-at-Risk in describing and capturing risk during extreme events such as the financial crisis. Our results are important to regulators, risk managers and investors.     

European policy and markets: Did policy initiatives stem the sovereign debt crisis in the euro area?

We investigate how European policy initiatives influenced market assessments of sovereign default risk and banking sector fragility during the sovereign debt crisis in four adversely affected countries — Portugal, Ireland, Spain and Italy. We focus on three broad groups of policies: (a) ECB policy actions (monetary and financial support), (b) EU programs (financial and fiscal rules as well as financial support in crisis countries), and (c) domestic austerity programs. We measure immediate market impact effects: what policies changed risk perceptions, using CDS spreads on sovereign bonds and banks in this assessment. We employ dynamic panel and event study methodologies in the empirical work. We find that a number of programs initially stabilized sovereign and bank bond markets (e.g. Outright Monetary Transactions program), although announcement and implementation impacts on markets differed in some cases (e.g. second Covered Market Bond Program). Actions designed to shore up sovereign markets often lowered risk assessments in bank bond markets and policies designed to ensure safety and soundness of the European banking system in some cases significantly impacted sovereign debt markets. Finally, a number of policies designed to stabilize markets had surprisingly little immediate impact on either sovereign or bank bond market risk assessments.     

Transmission channels of international financial crises to African stock markets: the case of the euro sovereign debt crisis

This article investigates the effects of the European sovereign debt crisis on African stock markets within a Bayesian shrinkage VAR framework. This method allows us to consider both North African and Sub-Saharan African stock markets, and provides a flexible parsimonious specification. The results reveal varying reactions of the impulse response functions. The most exposed African stock markets are those of Egypt, South Africa and Mauritius, while the least affected stock market is, surprisingly, that of Ivory Coast. Our analysis shows that, in addition to direct transmission, several macroeconomic and market channels, such as commodities, exports, and exchange rates, are relevant. Specifically, countries with strong commercial links to European countries will be most impacted by the crisis. The severity of transmission also depends on the country’s dependence on commodities.     

TIME‐VARYING VOLATILITY,DEFAULT, AND THE SOVEREIGN RISK PREMIUM

This article studies how volatility changes affect sovereign spreads in strategic default models. Volatility changes affect savings and sovereign spreads. However, the impact of volatility shocks is state dependent; when the economy has a low debt, an increase in volatility is prone to generate precautionary savings. Instead, with high debt, an increase in volatility is likely to induce an even further increase in debt and spreads, both in endowment and production economies. I document a positive correlation between sovereign spreads and aggregate income volatility for a set of European economies during the debt crisis, consistent with the model's implications.     

Do sovereign rating announcements affect emerging market exchange rate correlations? A multivariate DCC-GARCH approach

This article investigates the effects of sovereign credit rating announcements on time-varying exchange rate return correlations for a sample of 11 emerging market countries over the period 2002–2015. The data set covers daily exchange rates and long-term foreign currency sovereign ratings, outlooks and watch list. The pairwise time-varying correlations are derived by corrected Dynamic Conditional Correlation (cDCC) modelling which is a member of multivariate Generalized Autoregressive Conditional Heteroskedasticity (GARCH) models family. Furthermore, to capture the global factor effect, a dynamic-weighted index is created by using dynamic principal component (DPC) analysis. Findings suggest that some of the emerging market exchange rate co-movements are affected by rating announcements. Upgrades of Moody’s and downgrades of Fitch lead to spillovers. Main source of these spillovers are sovereign credit rating changes of European countries, especially Czech Republic and Turkey. Countries with high amount of external debt, large current account deficit and speculative grade are more prone to be influenced by announcements on a foreign country’s long-term sovereign rating.     

On the time-varying relationship between EMU sovereign spreads and their determinants

We use a dynamic multipath general-to-specific algorithm to capture structural instability in the link between euro area sovereign bond yield spreads against Germany and their underlying determinants over the period January 1999–August 2011. We offer new evidence suggesting a significant heterogeneity across countries, both in terms of the risk factors determining spreads over time as well as in terms of the magnitude of their impact on spreads. Our findings suggest that the relationship between euro area sovereign risk and the underlying fundamentals is strongly time-varying, turning from inactive to active since the onset of the global financial crisis and further intensifying during the sovereign debt crisis. As a general rule, the set of financial and macro spreads' determinants in the euro area is rather unstable but generally becomes richer and stronger in significance as the crisis evolves.     

Developing countries’ financial vulnerability to the eurozone crisis: an event study of equity and bond markets

The global crisis highlights the continued vulnerability of developing countries to shocks from advanced economies. Just a few years after the global crisis, the eurozone sovereign debt crisis has emerged as the single biggest threat to the global outlook. In this paper, we apply the event study methodology to gauge the scope for financial contagion from the EU to developing countries. More specifically, we estimate the responsiveness of equity and bond markets in developing countries to global crisis period and eurozone crisis news. Overall, we find that whereas global crisis period had a consistently negative effect on returns of equity and bond markets in developing countries, the effect of eurozone crisis news was more mixed and limited.     

“欧洲学期”:欧盟改善经济治理的重要一步

主权债务危机充分暴露出欧盟内部经济治理方面的体制性缺陷,也让成员国看到深化欧盟内部融合、增进财政预算和宏观经济政策协调的必要性。"欧洲学期"就是欧盟在债务危机恶化之际推出的一项重大改革举措,是完善欧盟经济治理的重要内容。因此,对这一机制的研究显得尤为必要。本文从"欧洲学期"机制的框架内容、创新之处、存在的问题、实施现状和预期政策效应等方面着手,试图对其做出较为客观全面的剖析,并给出初步的评价。     

Effects of US interest rates and news on the daily interest rates of a highly indebted emerging economy: evidence from Turkey

It has been widely demonstrated that asset prices react sensitively to macroeconomic news releases both in the industrialized countries and emerging markets. However, there are contradicting results on the effects of changes in interest rates of industrialized countries on asset prices of emerging markets. In heavily indebted economies, in addition to these factors, political news and announcements from international institutions that may increase or decrease concerns about debt sustainability can affect asset prices as well. This potential notwithstanding, there has been relatively limited empirical work on the effects of such variables. The objective of this study is to quantify the impact of all of these factors on interest rates of a highly indebted emerging economy. Using daily post-crisis data of the Turkish economy we show that both good and bad political news, International Monetary Fund announcements, and European Union related news significantly affected secondary market government securities yields, whereas volatility of yields was affected mainly by bad news releases. Changes in US Treasury bond rates and ‘appetite’ for risk of foreign investors did not affect government securities yields in the period analysed.     

Foreign banks,financial crises and macroeconomic fluctuations

Understanding the implications of increased foreign bank presence is especially compelling in periods of financial crisis. In this paper, we explore this issue by examining the relationship between the involvement of foreign banks in the banking systems and the volatility of key macroeconomic variables in normal and crisis periods. Using a sample of 20 Emerging European countries from 1998 to 2013, we find that an increase in the assets of foreign banks in the banking system reduces output and consumption growth volatility in general but does not significantly affect the volatility of investments. However, these banks were found to play a significant role in increasing output, consumption and investment volatility in 2009. Our findings suggest that foreign banks’ harmful impact during the global crisis was only temporary and that they seem to help Emerging European countries stabilize macroeconomic volatility in normal times and after the global crisis.     

Housing market volatility connectedness among G7 countries

This study investigates international linkages among housing markets in the G7 countries, using the connectedness methodology developed in Diebold and Yilmaz (2012, 2015). We find that volatility connectedness varies over the business cycle, with a surge during the global financial crisis. We also show that the United States and Italy were major net transmitters of housing market volatility shocks to other countries during the global financial crisis and the European debt crisis, respectively.     

An Alternative Approach to the Institutional Economics of the Eurozone Crisis

I argue that the Eurozone crisis is neither a crisis of European sovereigns in the sense of governmental over-borrowing, nor a crisis of sovereign debt market over-lending. Rather, it is a function of the “sovereign debt market” institution itself. Crisis, I argue, is not an occurrence, but an element fulfilling a precise technical function within this institution. It ensures the possibility of designating — in the market’s day-to-day mechanisms rather than analytical hindsight — normal (tranquil, undisturbed) market functioning. To show this, I propose an alternative view on the institutional economics of sovereign debt markets. First, I engage literature on the emergent qualities of the institutions “market” and “firm” in product markets, concluding that the point of coalescence for markets is the approximation of an optimal observation of consumer tastes. I then examine the specific institution “financial markets,” where the optimal observation of economic fundamentals is decisive. For the specific sub-institution “sovereign debt market,” I conclude that the fundamentals in question — country fundamentals — oscillate between a status of observable fundamentals outside of markets and operationalized fundamentals influenced by market movements. This, in turn, allows me to argue that the specific case of the Eurozone crisis is due to neither of the two causes mentioned above. Rather, the notion of “crisis” takes on a technical sense within the market structure, guaranteeing the separation of herd behavior and isomorphic behavior on European sovereign debt markets. By the same token, the so-called Eurozone crisis ceases to be a crisis in the conventional sense.