WORKING PAPERS

A sentiment-based risk indicator for the Mexican financial sector (with Raul Fernandez and Brenda Palma Guizar, Banco de Mexico), submitted

 

We apply sentiment analysis to Twitter messages in Spanish to build a sentiment risk index for the financial sector in Mexico. Using a sample of tweets that covers the period 2006-2019, we classify the tweets to identify messages in response to a positive or negative shock to the Mexican financial sector relative to merely informative ones. We use a voting classifier approach based on three different classifiers: one based on word polarities from a pre-defined dictionary; one based on a support vector machine classifier; and one based on neural networks. We find that the voting classifier outperforms each of the other classifiers when taken alone. Next, we compare our sentiment index with existing indicators of financial stress based on quantitative variables. We find that this novel index captures the impact of sources of financial stress not explicitly encompassed in quantitative risk measures, such as financial frauds, failures in payment systems, and money laundering. Finally, we show that a shock in our Twitter sentiment index correlates positively with an increase in financial market risk, stock market volatility, sovereign risk, and foreign exchange rate volatility.

Pulled down by the state: the effect of sovereign shocks on banks' health in the European sovereign crisis 

 

The European crisis in the late 2000s has revealed a vicious circle between the financial health of governments and banks, reflecting banks' holdings of sovereign debt and government commitments to financial bailouts. Understanding the linkages between sovereign and banking risk is a central element of an effective macroprudential policy framework. However, identifying the direction of causality between the two is a major challenge. I tackle this problem by compiling a timeline of news between 2004 and 2013 and separating them into news that primarily affect banks, primarily affect governments, or impact both. The shocks identified by this narrative approach are used as instruments in a TSLS regression that estimates the effect of sovereign Credit Default Swaps (CDS) spreads on banking CDS spreads. The analysis relies on a panel of daily banking and sovereign CDS spreads for ten Euro Area countries between 2004 and 2013. I find that the impact is heterogeneous across space and time. In particular, shocks to sovereign CDS spreads in Periphery countries significantly increase the banking CDS spreads in these countries during the financial crisis. No such link is found for the Core countries. Finally, I show that policy decisions such as the intervention by Mario Draghi in July 2012 affect the transmission, and that the subsequent introduction of Outright Monetary Transactions by the European Central Bank broke the sovereign-bank nexus.

OTHER PROJECTS

Spinning sombrero: spillovers and spillbacks of advanced economies' monetary policies through Mexican banks' international lending (with Frank-Alexander Raabe, ESM)

Sovereign Risk Spillovers through Banks in the Euro Area

 

PUBLICATIONS

"Liberalizzare l'economia per salvare l'euro", with Francesco Giavazzi, introduction to Agnès Bénassy-Quéré and Benoît Coeuré, "L'euro della discordia: come è possibile un'economia della moneta unica" Università Bocconi Editore,Milan, November 2014. Italian edition by Caterina Rho.

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