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Lookup NU author(s): Professor Dimitrios Gounopoulos
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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.
Author(s): Gounopoulos D, Kizys R, Koutelidakis Y, Paltalidis N
Publication type: Article
Publication status: Published
Journal: Journal of Banking and Finance
Year: 2015
Volume: 61
Issue: Supplement 1
Pages: S36-S52
Print publication date: 15/12/2015
Online publication date: 28/04/2015
Acceptance date: 12/03/2015
ISSN (print): 0378-4266
ISSN (electronic): 1872-6372
Publisher: Elsevier
URL: http://dx.doi.org/10.1016/j.jbankfin.2015.03.021
DOI: 10.1016/j.jbankfin.2015.03.021
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