Financial Stability in European Banking: The Role of Common Factors
AbstractIn this paper, I investigate the development and determinants of CDS spreads for 18 major European banks between December 2001 and January 2004 applying factor analysis to daily data. Two clear-cut conclusions can be drawn. First, the dominating first common factor that explains 88 percent of all variation in the system, impacts on all banks in a similar direction. This suggests a strong market integration. However the size of the response of each bankâ€™s CDS spread to the first common factor differs substantially, probably reflecting differences in individual bankâ€™s exposure and riskiness. Second, the first common factor appears significantly related to the European P/E ratio and the European-wide 2-year nominal interest rate. This finding suggests that the common factor may be interpreted as a general indicator of market conditions. Copyright Springer Science + Business Media, LLC 2006
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Bibliographic InfoArticle provided by Springer in its journal Open Economies Review.
Volume (Year): 17 (2006)
Issue (Month): 4 (December)
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Web page: http://www.springerlink.com/link.asp?id=100323
credit default swap spreads; risk premium; financial integration;
Other versions of this item:
- Clemens J.M. Kool, 2007. "Financial Stability in European Banking: The Role of Common Factors," Money Macro and Finance (MMF) Research Group Conference 2006 101, Money Macro and Finance Research Group.
- Clemens Kool, 2006. "Financial Stability in European Banking: The Role of Common Factors," Working Papers 06-13, Utrecht School of Economics.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
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