An analysis of financial stability indicators in European banking: the role of common factors
AbstractIn this paper, we investigate the information content of three market indicators of financial instability using daily data on subordinated debt spreads (SND), credit default swap spreads (CDS) and implied option volatility (IV) over the period January 2001 â€“ January 2004 for a sample of twenty major European banks. Using common factor analysis, we find for each indicator a significant common factor across banks, which we label the â€œmarketâ€ factor. This market factor explains between 61 and 92 percent of total variation. Cointegration analysis shows that the market factor in each case is significantly related to macro financial variables such as the short term nominal interest rate, the yield spread and a European Price earning stock ratio. Hence, market risk is primarily affected by aggregate economic and financial developments which are widely seen to impact financial markets. The driving variables of market risk are different for the bond and equity markets with short-term interest rates and yield curve dominating the bond market (SND) and P/E ratio and short-term interest rate significantly influencing the equity market (IV). The CDS market seems to lie somewhat in between these two classical markets, with closer links, however, to the traditional bond market. Little evidence is found that idiosyncratic bankspecific risks are a major component of SND, CDS and IV developments.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Utrecht School of Economics in its series Working Papers with number 06-12.
Length: 34 pages
Date of creation: 2006
Date of revision:
Contact details of provider:
Postal: P.O. Box 80125, NL-3508 TC Utrecht
Phone: +31 30 253 9800
Fax: +31 30 253 7373
Web page: http://www.uu.nl/EN/faculties/leg/organisation/schools/schoolofeconomicsuse/Pages/default.aspx
More information through EDIRC
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-03-10 (All new papers)
- NEP-BAN-2007-03-10 (Banking)
- NEP-RMG-2007-03-10 (Risk Management)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Alenka Kavkler & Mejra Festić, 2010. "The Trade Deficit and Banking Sector Results in Romania and Bulgaria," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 12(27), pages 199-213, February.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marina Muilwijk).
If references are entirely missing, you can add them using this form.