Bank Credit Risk Events and Peers’ Equity Value

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Fuertes, Ana-Maria and Robles, M. Dolores (2020) Bank Credit Risk Events and Peers’ Equity Value. [ Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 06, 2021, ISSN: 2341-2356 ]

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Abstract

This paper documents a negative cross-transmission of bank-idiosyncratic credit risk events to the equity value of peers comprising other banks, insurance and real estate firms inter alia. Large jumps in the idiosyncratic component of bank CDS spreads significantly reduce the equity value of peers, particularly on the event day. The negative externality does not hinge on the “information connectedness” between the two entities as proxied by characteristics such as common core line of business, common country or region, and inter-country common legal tradition. The negative externality is stronger in turmoil market conditions when risk-aversion levels are higher and/or investors are subject to pessimism. The more fragile the risk profile of the event bank and peer firm prior to the event the stronger the cross-transmission. The findings lend support to the wake-up call paradigm at micro level, and are insightful towards a better assessment of the vulnerability of the financial system.


Item Type:Working Paper or Technical Report
Additional Information:

This paper was partly written while the second author was a visiting scholar at Cass Business School. We thank the editor, Brian Lucey, and three anonymous referees for useful comments. The paper benefitted from discussions with Jerry Coakley, Nongnuch Tantisantiwong, Orkun Saka, and participants at the 15th INFINITI Conference on International Finance, University of Valencia, and the 26th Finance Forum, University of Cantabria, Santander for useful comments and suggestions.

.Professor of Finance and Econometrics, Cass Business School, City, University of London, ECIY 8TZ, England; Tel: +44 (0)20 7040 0186; e-mail: a.fuertes@city.ac.uk. Corresponding author.
. Associate Professor of Finance and Econometrics, Universidad Complutense de Madrid (UCM), Campus de Somosaguas, 28223, Pozuelo de Alarcón, Madrid, Spain; e-mail: mdrobles@ucm.es.

Uncontrolled Keywords:Credit Risk Events; Credit Default Swaps; Equity value; European banking; Cross-transmission; Wake-up Call.
Subjects:Social sciences > Economics > Banks and credit unions
Social sciences > Economics > Econometrics
Social sciences > Economics > Finance
JEL:C13, C58, G14, G20
Series Name:Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE)
Volume:2021
Number:06
ID Code:64890
Deposited On:15 Apr 2021 11:51
Last Modified:16 Apr 2021 10:34

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