Abstract This project aims at developing a solid understanding of the channels through which shocks are transmitted through and between financial markets in Europe. In particular, we will study the role of the banking market, the bond market, and the equity market for the transmission of shocks. In order to thoroughly assess the role played by Europe's financial markets for the propagation of shocks we will also study the links between financial market development and real economic activity. We will analyse the exposure of banks to changes in risk in integrated markets and the transmission of shocks through cross-border activities of banks. In order to improve our understanding of how the European bond markets work after the launching of the euro, we will evaluate potential differences in the transmission of the single monetary policy on the macroeconomic variables of the different EMU members.The project will clarify how equity market integration has affected the transmission of shocks across countries and how vulnerable European equity markets are to contagion effects. As evidenced by the recent turmoil in Asia, this is of utmost societal importance. We will also investigate the links between financial market developments and real economic activity in the EU. Our results will help to assess how autonomous financial market shocks propagate through financial markets and how an initial purely financial shock may eventually affect real economic activity. As the project covers the most important segments of European financial markets, our research will have a significant impact on a broad spectrum of policy issues including banking supervision, the promotion of bond market liquidity, the reforms of equity market institutions, and not least macroeconomic policy.
Call for proposal
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