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Risk Diversification by European Financial Conglomerates

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Author Info

  • Jan Frederik Slijkerman

    ()
    (Faculty of Economics, Erasmus Universiteit Rotterdam)

  • Dirk Schoenmaker

    ()
    (Vrije Universiteit Amsterdam, and Ministry of Finance, The Hague)

  • Casper de Vries

    ()
    (Faculty of Economics, Erasmus Universiteit Rotterdam)

Abstract

We study the dependence between the downside risk of European banks and insurers. Since the downside risk of banks and insurers differs, an interesting question from a supervisory point of view is the risk reduction that derives from diversification within large banks and financial conglomerates. We discuss the limited value of the normal distribution based correlation concept, and propose an alternative measure which better captures the downside dependence given the fat tail property of the risk distribution. This measure is estimated and indicates better diversification benefits for conglomerates versus large banks.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 05-110/2.

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Date of creation: 08 Dec 2005
Date of revision:
Handle: RePEc:dgr:uvatin:20050110

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Web page: http://www.tinbergen.nl

Related research

Keywords: Financial conglomerates; Banking; Insurance; Diversification; Extreme Value Theory;

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References

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  1. Hartmann, P. & Straetmans, S. & De Vries, C.G., 2001. "Asset Market Linkages in Crisis Periods," Papers 71, Quebec a Montreal - Recherche en gestion.
  2. Dennis Jansen & Casper de Vries, 1988. "On the frequency of large stock returns: putting booms and busts into perspective," Working Papers, Federal Reserve Bank of St. Louis 1989-006, Federal Reserve Bank of St. Louis.
  3. Allen N. Berger, 2000. "The integration of the financial services industry: where are the efficiencies?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2000-36, Board of Governors of the Federal Reserve System (U.S.).
  4. J.A. Bikker & I.P.P. van Lelyveld, 2002. "Economic versus Regulatory Capital for Financial Conglomerates," Research Series Supervision (discontinued), Netherlands Central Bank, Directorate Supervision 45, Netherlands Central Bank, Directorate Supervision.
  5. de Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic Risk: A Survey," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2634, C.E.P.R. Discussion Papers.
  6. Kristin Forbes & Roberto Rigobon, 1999. "No Contagion, Only Interdependence: Measuring Stock Market Co-movements," NBER Working Papers 7267, National Bureau of Economic Research, Inc.
  7. Gianni De Nicoló & Myron L. Kwast, 2002. "Systemic Risk and Financial Consolidation," IMF Working Papers 02/55, International Monetary Fund.
  8. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
  9. Estrella, Arturo, 2001. "Mixing and matching: Prospective financial sector mergers and market valuation," Journal of Banking & Finance, Elsevier, vol. 25(12), pages 2367-2392, December.
  10. Carow, Kenneth A., 2001. "Citicorp-Travelers Group merger: Challenging barriers between banking and insurance," Journal of Banking & Finance, Elsevier, vol. 25(8), pages 1553-1571, August.
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Cited by:
  1. Kerstin Bernoth & Andreas Pick, 2009. "Forecasting the fragility of the banking and insurance sector," DNB Working Papers, Netherlands Central Bank, Research Department 202, Netherlands Central Bank, Research Department.
  2. De Jonghe, Olivier, 2010. "Back to the basics in banking? A micro-analysis of banking system stability," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 19(3), pages 387-417, July.
  3. Tomas Fiala & Tomas Havranek, 2014. "Ailing Mothers, Healthy Daughters? Contagion in the Central European Banking Sector," William Davidson Institute Working Papers Series wp1069, William Davidson Institute at the University of Michigan.
  4. De Jonghe, O.G., 2009. "Back to Basics in Banking? A Micro-Analysis of Banking System Stability," Discussion Paper, Tilburg University, Center for Economic Research 2009-45 S, Tilburg University, Center for Economic Research.
  5. Robert DeYoung & Douglas Evanoff & Philip Molyneux, 2009. "Mergers and Acquisitions of Financial Institutions: A Review of the Post-2000 Literature," Journal of Financial Services Research, Springer, Springer, vol. 36(2), pages 87-110, December.
  6. Pais, Amelia & Stork, Philip A., 2011. "Contagion risk in the Australian banking and property sectors," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 681-697, March.
  7. Olivier De Jonghe, 2008. "The impact of revenue diversity on banking system stability," EIEF Working Papers Series 0815, Einaudi Institute for Economics and Finance (EIEF), revised Jul 2008.
  8. Nedelchev, Miroslav, 2010. "Корпоративно Управление На Финансови Групи (Спазвай И Обяснявай)
    [Corporate Governance of Financial Groups (Comply and Explain)]
    ," MPRA Paper 52249, University Library of Munich, Germany.

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