Extreme Stock Return Co-movements of Financial Institutions: Contagion or Interdependence?
AbstractThis paper investigates contagion of major financial institutions by focusing on extreme stock return co-movements. Our measure of contagion within banking and insurance sectors is the number of coincidences of daily extreme returns that cannot be explained by a linear propagation model of constant correlation. Using a Monte Carlo simulation experiment, we find evidence of contagion for the US, Germany and the UK. This result is stronger for the insurance sector than for the banking sector. In addition, we investigate extreme co-movements among banking and insurance sectors using a multinomial logistic regression model. We find evidence of contagion, even if we control for a number of macroeconomic fundamentals. This indicates that insurance companies are important for the well-functioning of the financial system.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Monetary and Economic Policy Department in its series MEB Series (discontinued) with number 2003-16.
Date of creation: Dec 2003
Date of revision:
banks; contagion; extreme co-movements; extreme stock returns; financial institutions; insurance companies; systemic risk;
Find related papers by JEL classification:
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-02-29 (All new papers)
- NEP-ETS-2004-02-29 (Econometric Time Series)
- NEP-FMK-2004-02-29 (Financial Markets)
- NEP-RMG-2004-02-29 (Risk Management)
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- Henriëtte Prast & Iman van Lelyveld, 2004.
"New Architectures in the Regulation and Supervision of Financial Markets and Institutions: The Netherlands,"
DNB Working Papers
021, Netherlands Central Bank, Research Department.
- Prast, H.M. & Lelyveld, I. van, 2004. "New architectures in the regulation and supervision of financial markets and institutions: The Netherlands," Open Access publications from Tilburg University urn:nbn:nl:ui:12-4296154, Tilburg University.
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