Spillover effects between Greece and Cyprus: a DCC model on the interdependence of small economies

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This paper discusses the volatility spillovers between the Greek debt crisis and the Cypriot financial crisis. Cyprus was in the spotlight of financial markets due to significant problems stemming from the banking sector, which were dealt with by EU regulators with a bail-in on bank deposits. The current analysis aims to shed light on the reasons behind implementing this novel approach to bank distress. The study uses a Dynamic Conditional Correlation model on the returns of the stock markets of the two countries, which shows strong spillover effects during the period leading up to the 2013 Cypriot crisis, but a significant decrease of these effects from then on. The results confirm the close interdependence of the Greek and Cypriot economies before 2013 and show that this interdependence was limited from that point onwards. This would indicate that since the risk of contagion to the Eurozone had diminished, regulators could test the bail-in solution in Cyprus in 2015. The current work contributes to the discussion on the interdependence of European economies. The paper’s findings can also be applied to other emerging European economies.

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    • Figure 1. Stock market returns (GFC period)
    • Figure 2. Stock market returns (EDC period)
    • Figure 3. Univariate conditional variances (GFC period)
    • Figure 4. Univariate conditional variances (EDC period)
    • Figure 5. GFC covariance
    • Figure 6. EDC covariance
    • Figure 7. GFC correlations
    • Figure 8. EDC correlations
    • Figure 9. Greek government debt as a percent of GDP
    • Figure 10. Greek and Cypriot government debt as % of GDP
    • Table 1. Descriptive statistics – Global Financial Crisis and Eurozone Debt Crisis
    • Table 2. Univariate estimations AR(1) – GJR GARCH (1,1)
    • Conceptualization
      Aristeidis Samitas, Elias Kampouris
    • Investigation
      Aristeidis Samitas, Elias Kampouris, Stathis Polyzos
    • Methodology
      Aristeidis Samitas, Elias Kampouris, Stathis Polyzos
    • Project administration
      Aristeidis Samitas
    • Supervision
      Aristeidis Samitas
    • Writing – review & editing
      Aristeidis Samitas, Elias Kampouris, Stathis Polyzos, Anastasia Ef. Spyridou
    • Data curation
      Elias Kampouris
    • Formal Analysis
      Elias Kampouris
    • Validation
      Elias Kampouris, Stathis Polyzos
    • Visualization
      Elias Kampouris
    • Writing – original draft
      Elias Kampouris
    • Resources
      Anastasia Ef. Spyridou
    • Software
      Anastasia Ef. Spyridou