Tsopanakis, Andreas (2014) Essays on financial stability, systemic risk and the spillover effects of

290 Pages·2014·3.12 MB·English

by  Andreas Tsopanakis

Tsopanakis, Andreas (2014) Essays on financial stability, systemic risk and
the spillover effects of financial crises. PhD thesis.

http://theses.gla.ac.uk/5496/

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Enlighten:Theses
http://theses.gla.ac.uk/
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Essays on Financial Stability, Systemic Risk and
the Spillover Effects of Financial Crises

Andreas Tsopanakis
BA, MSc, MPhil

Submitted in fulfillment of the requirements for the Degree of
Doctor of Philosophy

Adam Smith Business School
College of Social Sciences
University of Glasgow

June 2014
Abstract

This thesis investigates in depth several aspects of economic activity through
an aggregated metric, which aims to account for the inherent distressful characteristics
of the financial system. This work is strongly motivated by the extraordinary
evolution of the financial and economic landscape and the induced fragility within its
foundations, especially during the last years.
Chapter 1 provides an overview of the theoretical considerations on the topics
discussed in this thesis. Additionally, the motivations and a brief presentation of the
thesis contents are provided.
Chapter 2 empirically investigates the leading indicator properties of the
aggregate systemic risk indices to the real economy. In order to do that, I construct a
series of financial stress indices for 25 countries. The countries are bundled into three
groups (OECD, Asian, Latin American countries) and, apart from the national
indexes, regional and a global index are computed. In order to do this, a number of
variables from the banking sector, financial and capital markets and the foreign
exchange market of each country, have been used for the implementation of these
indicators. The indexes are successful early warning indicators, accurately capturing
previous financial stress periods, while the financial turmoil of 2007-2009 is, without
doubt, the most severe one. Forecasting exercises indicate the improved ability of
indices-enhanced models to successfully predict the evolution of economic activity.
Chapter 3 investigates the interrelations and financial interconnections of the
Eurozone economies. Financial stress indices are constructed for, both, countries and
their four most important financial markets (banking, money, equity and bond). Using
VAR models, a number of innovative conclusions are reached, such that: 1) not all
peripheral countries (and especially Greece and Portugal) should be blamed for the
crisis exacerbation 2) there is clear evidence of stronger interdependencies between
banking and bond markets and 3) a degree of segregation (in terms of financial stress
interdependence) between peripheral and core Eurozone economies.
The last essay aims to the deeper empirical investigation of potential cross-
covariances and spillover effects between the Eurozone economies and financial
markets. Full, asymmetric GARCH-BEKK models are estimated, both on a market (or
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country) wide level and, then, with the full spectrum of Euro Area markets. In other
words, we complete an empirical examination, both “within” and “between”
Eurozone economies and markets. The results reveal a number of interesting insights:
on country wide level, there is strong volatility transmission channel from the most
heavily hit, from the crisis, economies towards the rest. Additionally, the crucial
importance and role on this transmission from the banking and bond markets is
underlined. Contrary to common wisdom, Greece is not the main propagator of
volatility uncertainty, while it is between the most important receivers of volatility
risk. The same holds for other peripheral economies, while the importance of money
market is also evident in the large, “between”, empirical approach.

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Table of Contents

List of Tables………………………………………………………………………….7
List of Figures……………………………………………………………………….10

Chapter 1: Introduction…………………………………………………………….15

1. Background Information and Motivation………………………………15
2. On Financial Stability, Systemic Risk and Its Metrics………………...17
3. A Short Historical Account……………………………………………...19
4. Thesis Overview………………………………………………………….20

Chapter 2: Exploring the Financial Conditions – Economic Conditions Nexus:
Empirical Evidence from Developed and Developing Countries………………...22

Abstract……………………………………………………………………………...22
1. Introduction………………………………………………………………23
2. Financial Stress Indices: An Account of the Literature……………….25
2.1 An Attempt to Define Financial Stress……………………………...27
2.2 Financial Stress Indices: Empirical Work for Advanced
Economies……………………………………………………………………28
2.3 Financial Stress Indices: Empirical Work for Developing
Economies……………………………………………………………………53
3. Data Description and Methodology……………………………………..63
4. Discussion of Results……………………………………………………..67
4.1 Global Financial Stress Index……………………………………….68
4.2 OECD and OECD Countries Financial Stress Indices…………….71
4.3 Asian and Asian Countries’ Financial Stress Indices……………...77
4.4 South American & South American Countries’ Financial Stress
Indices………………………………………………………………………..79
5. Predicting Economic Conditions with Financial Conditions………….81
5.1 Model Specification & Methodologies Used for the Forecasting
Exercise………………………………………………………………………82
5.2 Testing for Unit Roots………………………………………………..84
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5.3 Forecasting Results…………………………………………………..87
5.4 Forecast Evaluations………………………………………………....93
6. Conclusions and Implications for future research……………………100

Chapter 3: An Investigation of Systemic Stress and Interdependencies within the
Eurozone and Euro Area
Countries…………………………………………………………………………...103

Abstract…………………………………………………………………………….103
1. Introduction……………………………………………………………..104
2. Financial Stress Measures for Eurozone and European Countries: An
account of the relevant literature…………………………………………107
3. Data and Empirical Methodology………………………………….......124
3.1 Dataset Description……………………………………………125
3.2 Methodological Approach…………………………………….132
3.2.1 Financial Stress Indexes Construction……………..133
3.2.2 Vector Autoregressive Empirical Analysis………...134
4. Eurozone Financial Stress Narrative…………………………………..139
4.1 Eurozone Financial Stress Indices……………………………139
4.2 Euro Area Countries Financial Stress Indices………………141
5. Empirical Analysis……………………………………………………...147
5.1 Euro-Wide VARS……………………………………………..149
5.2. Country-Specific VARS.……………………………………...164
5.3. Further Evidence and Robustness Checks…………………..164
5.3.1. Generalized Impulse Responses…………………....165
5.3.2. Block Exogeneity Tests……………………………..165
5.3.3. VARS with PCA-based Financial Stress Indexes…166
6. Concluding Remarks……………………………………………………167

Chapter 4: Volatility Co-movements and Spillover Effects within the Eurozone
Economies: A Multivariate GARCH Approach using the Financial Stress
Index………………………………………………………………………………..169

Abstract…………………………………………………………………………….169
1. Introduction……………………………………………………………..170
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2. Eurozone Crisis and Modeling of Spillover Effects…………………..171
3. Dataset and Methodological Approach………………………………..178
3.1 Dataset Description and Aggregate Method…………………179
3.2 Spillover Definition…………………………………………….183
3.3 Volatility Transmission Models: Empirical Methodology…184
4. Discussion of Results……………………………………………………186
4.1 Indexes Descriptive Statistics and Stationarity……………...187
4.2 BEKK models………………………………………………….189
4.2.a Market level and Country-wide models……………190
4.2.b Cross market models………………………………..199
5. Concluding Remarks…………………………………………………...203

Chapter 5: Conclusions……………………………………………………………206
1. Overview………………………………………………………………....206
2. Key finding and policy implications…………………………………...207
3. Future research avenues………………………………………………..211

Appendix
Chapter 2…………………………………………………………………..213
Chapter 3…………………………………………………………………..217
Chapter 4…………………………………………………………………..264

References…………………………………………………………………………275

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List of Tables

Table 2.1: Summary Statistics for Global and Regional FSI…………………….69
Table 2.2: OECD: Numbers of Episodes & Duration per Stress Type………….76
Table 2.3: Asia: Numbers of Episodes & Duration per Stress Type…………….78
Table 2.4: Latin America: Numbers of Episodes & Duration per Stress Type…80
Table 2.5: Unit Root Tests for OECD Countries………………………………….85
Table 2.6: Unit Root Tests for Asian Countries…………………………………..86
Table 2.7: Unit Root Tests for Latin American Countries……………………….87
Table 2.8.A: Out of Sample Forecasting Performance for OECD Countries – 1.88
Table 2.8.B: Out of Sample Forecasting Performance for OECD Countries – 2.89
Table 2.9: Out of Sample Forecasting Performance for Asian Countries………91
Table 2.10: Out of Sample Forecasting Performance for Latin American
Countries…………………………………………………………………….92
Table 2.11: Tests of Equal Predictive Ability for OECD Countries – Rolling
Forecasting Case…………………………………………………………….96
Table 2.12: Tests of Equal Predictive Ability for Developing Economies – Rolling
Forecasting Case…………………………………………………………….97
Table 2.13: Tests of Equal Predictive Ability for OECD Countries – Dynamic
Forecasting Case…………………………………………………………….98
Table 2.14: Tests of Equal Predictive Ability for Developing Economies –
Dynamic Forecasting Case…………………………………………………99
Table 3.1: Indicators of Financial Stress…………………………………………126
Table 3.2: ADF Test Results………………………………………………………149
Table 3.3.A: Summary of Financial Stress Shocks in Eurozone Countries……151
Table 3.3.B: Summary of Financial Stress Shocks in Eurozone Countries……152
Table 3.4.A: Summary of Banking Stress Shocks in Eurozone Countries…….154
Table 3.4.B: Summary of Banking Stress Shocks in Eurozone Countries……..154
Table 3.5.A: Summary of Money Stress Shocks in Eurozone Countries………156
Table 3.5.B: Summary of Money Stress Shocks in Eurozone Countries………157
Table 3.6.A: Summary of Equity Stress Shocks in Eurozone Countries………159
Table 3.6.B: Summary of Equity Stress Shocks in Eurozone
Countries…………………………………………………………………………...159
Table 3.7.A: Summary of Bond Stress Shocks in Eurozone Countries…...……161
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Table 3.7.B: Summary of Bond Stress Shocks in Eurozone Countries………...162
Table 4.1: Indicators of Financial Stress…………………………………………180
Table 4.2: Descriptive Statistics of Financial Stress Indexes Returns………….188
Table 4.3: BEKK-MGARCH Model for α : Countries Case…………………...191
ij
Table 4.4: BEKK-MGARCH Model for β : Countries Case…………………...192
ij
Table 4.5: BEKK-MGARCH Model for α : Banking Sector Case……………..194
ij
Table 4.6: BEKK-MGARCH Model for β : Banking Sector Case……………..194
ij
Table 4.7: BEKK-MGARCH Model for α : Money Market Case……………..195
ij
Table 4.8: BEKK-MGARCH Model for β : Money Market Case……………..195
ij
Table 4.9: BEKK-MGARCH Model for α : Equity Market Case……………..197
ij
Table 4.10: BEKK-MGARCH Model for β : Equity Market Case…………….197
ij
Table 4.11: BEKK-MGARCH Model for α : Bond Market Case……………...198
ij
Table 4.12: BEKK-MGARCH Model for β : Bond Market Case……………...198
ij
Table 4.13: BEKK-MGARCH Model for α : Cross-Markets Case……………201
ij
Table 4.14: BEKK-MGARCH Model for β : Cross-Markets Case……………202
ij
Appendix – Chapter 2
Table A.1: Principal Component Analysis for Banking Sector – 1…………….228
Table A.2: Principal Component Analysis for Banking Sector – 2…………….229
Table A.3: Principal Component Analysis for Money Markets………………..230
Table A.4: Principal Component Analysis for Equity Markets………………..230
Table A.5: Principal Component Analysis for Bond Markets………………….231
Table A.6: Sample of European Banks…………………………………………..232
Table A.7 Block Exogeneity Wald Tests for Financial Stress Indices of Eurozone
Countries…………………………………………………………………...249
Table A.8 Block Exogeneity Wald Tests for Banking Stress Indices…………..250
Table A.9 Block Exogeneity Wald Tests for Money Market Stress Indices…...251
Table A.10 Block Exogeneity Wald Tests for Equity Market Stress Indices….252
Table A.11 Block Exogeneity Wald Tests for Bond Market Stress Indices……253
Appendix – Chapter 4
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Table A.1: Euro Area Countries FSIs Correlation Matrix……………………..269
Table A.2: Euro Area Banking FSIs Correlation Matrix……………………….269
Table A.3: Euro Area Money FSIs Correlation Matrix....……………………...269
Table A.4: Euro Area Equity FSIs Correlation Matrix………………………269
Table A.5: Euro Area Bond FSIs Correlation Matrix…………………………..270
Table A.6: “News Effect” Coefficients from the Intra-Market GARCH-BEKK
(1,1) Models………………………………………………………………...271
Table A.7: Probability Values for the “News Effect” Coefficients from the Intra-
Market GARCH-BEKK (1,1) Models……………………………………272
Table A.8: “Volatility Spillover” Coefficients from the Intra-Market GARCH-
BEKK (1,1) Models………………………………………………………..273
Table A.9: Probability Values for the “Volatility Spillover” Coefficients from the
Intra-Market GARCH-BEKK (1,1) Models……………………………..274

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