The Euribor-EONIA Swap spread as an indicator of a financial crisis in the Eurozone
1University of Oulu, Oulu Business School, Department of Economics, Economics
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Oulu : S. Wilhelmsson,
The aim of this Master’s Thesis is to evaluate if the spread between the 3-month Euribor and the 3-month EONIA Swap was a valid indicator of a financial crisis in the Eurozone during 2005–2014. The method is to measure the degree of correlation to certain events during the financial crisis, to the equity markets and the stock market volatility. The indices used in this research are the Euro STOXX 50 stock index and the Euro STOXX 50 volatility index.
The correlation is evaluated through OLS-based regression analysis with an autoregressive model with an exogenous predictor variable. The results indicate that an increase in the spread indicates a financial crisis by correlating with negative returns in the stock market and increases in the stock market implied volatility. The spread could thus be used as an indicator of a financial crisis in the Eurozone during 2005–2014, but its validity is challenged by the omitted variable bias of various variables that might affect to the stock market returns and the stock market volatility during a financial crisis and during an economic recession. Correlation exists with the stock market returns, stock market volatility and the development of the spread, but any conclusions cannot be made on the causality or the predictive force of the spread to a financial crisis.
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