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Sovereign risk zones in Europe during and after the debt crisis

Arakelian, V; Dellaportas, P; Savona, R; Vezzoli, M; (2019) Sovereign risk zones in Europe during and after the debt crisis. Quantitative Finance , 19 (6) pp. 961-980. 10.1080/14697688.2018.1562197. Green open access

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Abstract

We employ a machine learning approach to build a European sovereign risk stratification using macroeconomic fundamentals and contagion measures, proxied by copula-based credit default swap (CDS) dependencies over the period 2008–2017, for France, Germany, Greece, Ireland, Italy, Portugal, and Spain. By adopting a recursive partitioning strategy, we detect specific risk zones varying from safe to high risk based on key predictors, and we construct their specification by assigning specific risk thresholds. While key macroeconomic fundamentals such as Debt/GDP and the unemployment rate remained the same and maintained the same risk thresholds during the sub-periods 2008–2013 and 2013–2017, the CDS spreads contagion dropped significantly over the post-Quantitative Easing years, lowering the corresponding risk thresholds. We estimate an impact on CDS spreads approximately of −105 basis points in the period 2013–2017 due to contagion mitigation.

Type: Article
Title: Sovereign risk zones in Europe during and after the debt crisis
Open access status: An open access version is available from UCL Discovery
DOI: 10.1080/14697688.2018.1562197
Publisher version: https://doi.org/10.1080/14697688.2018.1562197
Language: English
Additional information: This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions.
Keywords: contagion, copula, credit default swaps, machine learning, regression trees, systemic risk
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL BEAMS
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences > Dept of Statistical Science
URI: https://discovery.ucl.ac.uk/id/eprint/10073074
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