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Bank risk behavior and connectedness in EMU countries

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Singh, Manish K. and Gómez-Puig, Marta and Sosvilla-Rivero, Simón (2015) Bank risk behavior and connectedness in EMU countries. Journal of International Money and Finance, 57 (Oct). pp. 161-184. ISSN 0261-5606

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Official URL: https://doi.org/10.1016/j.jimonfin.2015.07.014



Abstract

Given the structural differences in banking sector and financial regulation at national level in EMU, this paper tries to estimate the banking sector risk behavior at country level. Based on contingent claim literature, it computes “Distance-to-default (DtD)” at bank level and analyses the aggregate series at country level for a representative set of banks over the period 2004-Q4 to 2013-Q2. The indices provide an intuitive, forward-looking and timely risk measure having strong correlations with national/regional market sentiment indicators. An underlying trend exists but causality tests suggest no systemic component. Cross-sectional differences in DtD suggests fragility in EMU countries 12-18 months prior to the crisis and better predictive ability than the regulatory index based on large and complex banking institutions at European level. Furthermore, we explore the reasons for this divergence using VAR estimates.


Item Type:Article
Uncontrolled Keywords:Contingent claim analysis, Distance-to-default, Banking risk.
Subjects:Social sciences > Economics > Banks and credit unions
Social sciences > Economics > Depressions
Social sciences > Economics > Finance
JEL:G01, G13, G21, G28
ID Code:59993
Deposited On:17 Apr 2020 09:37
Last Modified:20 Apr 2020 06:51

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