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Economic Integration and Financial Stability

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  • Gianni De Nicoló
  • Alexander F. Tieman

Abstract

This paper assesses changes in synchronization of real activity and financial market integration in Western Europe and evaluates their implications for financial stability. We find increased synchronization of real activity since the early 1980s and increased equity markets integration since the early 1990s. We also find that measures of systemic risk at large European financial institutions have not declined during the period 1990-2004 and that bank systemic risk profiles have converged. At the same time, the sensitivity of bank and insurance systemic risk measures to common real and financial shocks has increased in most countries. Overall, these results suggest that the integration process does not necessarily entail an unambiguously positive effect on financial stability.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/296.

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Length: 28
Date of creation: 01 Dec 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/296

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Keywords: Financial stability; European Union; Economic models; equation; risk profiles; insurance companies; correlation; probability; equations; insurance risk; credit risk; risk metrics; covariance; proxy measure; standard deviation; statistical model; underwriting; time series; standard error; probabilities; credit risks; random variables; statistic; standard deviations; prediction; random walk; risk profile; maximum likelihood methods; statistics; estimation procedure; autocorrelation;

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References

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  1. Kevin J. Stiroh, 2002. "Diversification in banking: is noninterest income the answer?," Staff Reports, Federal Reserve Bank of New York 154, Federal Reserve Bank of New York.
  2. Lumsdaine, Robin L. & Prasad, Eswar, 2002. "Identifying the Common Component of International Economic Fluctuations: A New Approach," IZA Discussion Papers 487, Institute for the Study of Labor (IZA).
  3. Kpate Adjaouté, 2004. "Equity Returns and Integration: Is Europe Changing?," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 20(4), pages 555-570, Winter.
  4. Philipp Hartmann & Stefan Straetmans & Casper G. De Vries, 2005. "Banking System Stability: A Cross-Atlantic Perspective," NBER Working Papers 11698, National Bureau of Economic Research, Inc.
  5. Gropp, Reint & Vesala, Jukka & Vulpes, Giuseppe, 2002. "Equity and bond market signals as leading indicators of bank fragility," Working Paper Series, European Central Bank 0150, European Central Bank.
  6. Kpate ADJAOUTE & Jean-Pierre DANTHINE, 2004. "Equity Returns and Integration: Is Europe Changing?," FAME Research Paper Series, International Center for Financial Asset Management and Engineering rp117, International Center for Financial Asset Management and Engineering.
  7. Flood, Robert P. & Rose, Andrew K., 2005. "Estimating the expected marginal rate of substitution: A systematic exploitation of idiosyncratic risk," Journal of Monetary Economics, Elsevier, Elsevier, vol. 52(5), pages 951-969, July.
  8. James H. Stock & Mark W. Watson, 2003. "Understanding Changes in International Business Cycle Dynamics," NBER Working Papers 9859, National Bureau of Economic Research, Inc.
  9. Lieven Baele & Annalisa Ferrando & Peter Hördahl & Elizaveta Krylova & Cyril Monnet, 2004. "Measuring financial integration in the euro area," Occasional Paper Series 14, European Central Bank.
  10. Nikola A. Tarashev, 2008. "An Empirical Evaluation of Structural Credit-Risk Models," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 4(1), pages 1-53, March.
  11. Marshall, David A., 2005. "Comment on: "Estimating the expected marginal rate of substitution"," Journal of Monetary Economics, Elsevier, Elsevier, vol. 52(5), pages 971-979, July.
  12. Ayhan Kose, M. & Otrok, Christopher & Whiteman, Charles H., 2008. "Understanding the evolution of world business cycles," Journal of International Economics, Elsevier, Elsevier, vol. 75(1), pages 110-130, May.
  13. Stiroh, Kevin J. & Rumble, Adrienne, 2006. "The dark side of diversification: The case of US financial holding companies," Journal of Banking & Finance, Elsevier, Elsevier, vol. 30(8), pages 2131-2161, August.
  14. Joel F. Houston & Kevin J. Stiroh, 2006. "Three decades of financial sector risk," Staff Reports, Federal Reserve Bank of New York 248, Federal Reserve Bank of New York.
  15. Maria Vassalou & Yuhang Xing, 2004. "Default Risk in Equity Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 59(2), pages 831-868, 04.
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Citations

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Cited by:
  1. Kimie Harada & Takatoshi Ito & Shuhei Takahashi, 2010. "Is the Distance to Default a Good Measure in Predicting Bank Failures? Case Studies," NBER Working Papers 16182, National Bureau of Economic Research, Inc.
  2. Saldías, Martín, 2013. "A market-based approach to sector risk determinants and transmission in the euro area," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(11), pages 4534-4555.
  3. Martin Saldías Zambrana, 2010. "Systemic risk analysis using forward-looking distance-to-default series," Working Paper 1005, Federal Reserve Bank of Cleveland.
  4. Tullio Jappelli & Marco Pagano, 2008. "Financial Market Integration under EMU," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 312, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  5. Srobona Mitra & Elena Duggar, 2007. "External Linkages and Contagion Risk in Irish Banks," IMF Working Papers 07/44, International Monetary Fund.
  6. Roman Horvath & Dragan Petrovski, 2012. "International Stock Market Integration: Central and South Eastern Europe Compared," William Davidson Institute Working Papers Series wp1028, William Davidson Institute at the University of Michigan.
  7. Francesco Vallascas & Kevin Keasey, 2013. "The Volatility of European Banking Systems: A Two-Decade Study," Journal of Financial Services Research, Springer, Springer, vol. 43(1), pages 37-68, February.
  8. Iryna V. Ivaschenko & Gianni De Nicoló, 2008. "Financial Integration and Risk-Adjusted Growth Opportunities," IMF Working Papers 08/126, International Monetary Fund.
  9. Harada, Kimie & Ito, Takatoshi & Takahashi, Shuhei, 2013. "Is the Distance to Default a good measure in predicting bank failures? A case study of Japanese major banks," Japan and the World Economy, Elsevier, Elsevier, vol. 27(C), pages 70-82.
  10. Jorge A. Chan-Lau & Srobona Mitra & Li L. Ong, 2007. "Contagion Risk in the International Banking System and Implications for London As a Global Financial Center," IMF Working Papers 07/74, International Monetary Fund.

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