Roberto Baviera, “A thermometer for financial instability in the euro area economy and the role of carry trade”

Thursday February 19  2015
Scuola Normale Superiore
Aula Bianchi

Roberto Baviera
Financial Engineering, Dipartimento di Matematica -Politecnico di Milano


This study suggests a simple financial instability indicator for the euro area economy.
It works as a discrete thermometer with three possible outcomes depending on the severity of the crisis. This indicator is based on the specific shape of the credit term structure for the two main peripheral countries in the area. The paper discusses how some key features of term structure are linked to government debt carry trade.
In order to assess the performance of the proposed market-based indicator, the paper shows how the identified episodes of financial turmoil are related with the timing and the intensity of unconventional measures in the euro area.