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Financial risk distribution in European Union

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  • D’Amico, Guglielmo
  • Scocchera, Stefania
  • Storchi, Loriano

Abstract

A methodology based on Markov chains and dynamic entropy measures is proposed for measuring and forecasting the evolution of the inequality of financial risks in the European Union (EU). The proposed methodology requires knowledge of the past evolution of sovereign credit rating for the EU member states and historical data concerning harmonized interest rates of government bonds. The methodology is applied to real data from European countries for the three rating agencies Fitch, Moody’s and Standard & Poor’s. Obtained results show that, although these rating agencies share similar view on the rating assignment process, they have a different perception of the risk when expressed in terms of basis points and this fact determines divergences on the forecasted financial inequality in the EU. The development of an open source and user friendly (i.e. we implemented also a Graphical User Interface) software (https://github.com/lstorchi/markovctheil) will permit the replication of all the results both for the actual scenario in the EU and for possible future scenarios as the Brexit.

Suggested Citation

  • D’Amico, Guglielmo & Scocchera, Stefania & Storchi, Loriano, 2018. "Financial risk distribution in European Union," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 505(C), pages 252-267.
    • Handle: RePEc:eee:phsmap:v:505:y:2018:i:c:p:252-267
    DOI: 10.1016/j.physa.2018.03.069
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    Cited by:

    1. Guglielmo D'Amico & Filippo Petroni & Philippe Regnault & Stefania Scocchera & Loriano Storchi, 2019. "A copula based Markov Reward approach to the credit spread in European Union," Papers 1902.00691, arXiv.org.
    2. Guglielmo D’Amico & Philippe Regnault & Stefania Scocchera & Loriano Storchi, 2018. "A Continuous-Time Inequality Measure Applied to Financial Risk: The Case of the European Union," IJFS, MDPI, vol. 6(3), pages 1-16, June.

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    More about this item

    Keywords

    Financial inequality; Markov chains; Sovereign credit ratings; Credit spreads; Dynamic Theil’s entropy;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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