An investigation of systemic stress and interdependencies within the Eurozone and Euro Area countries

One of the most challenging issues that economists are dealing with is the investigation of the financial turmoil in Eurozone economies. Particularly, the issue of exposing the potential crisis transmission channels has attracted considerable interest. Aiming to contribute to this literature, we construct financial stress indices on a country level and explore further the potential inter-reactions between the root causes of systemic risk. The country-specific index consists of a wide number of series drawn from the money, equity and bond markets, as well as from the banking sector of each Eurozone country. A Euro Area stress index is also provided, exploring the evolution of financial conditions for this group of countries. The investigation of the potential transmission channels is implemented through a multivariate analysis and the corresponding impulse responses' dynamics. The empirical findings suggest that countries are mostly responsive to their own financial shocks, while a degree of regionalism is also evident. That is, the peripheral countries are more susceptible to their financial stress, while the same holds for the core Eurozone countries. Additionally, in contrast to common wisdom, financial conditions in Greece and Portugal do not seem to affect the rest of the Euro Area, at least in the degree that Italy and Ireland do. These results are consistent under alternative model and sample specifications. •We construct financial stress indexes for the major Eurozone economies.•A wide number of financial markets are included into our stress indices.•We develop a VAR model in order to examine the potential interconnections between these economies.•Financial conditions in PIIGS do not strongly affect Euro Area countries. Evidence of regionalism in financial stress level.•The results are robust to a number of different model and sample specifications.