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.
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Bibliographic InfoPaper provided by Utrecht School of Economics in its series Working Papers with number 06-13.
Length: 21 pages
Date of creation: Jun 2006
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Other versions of this item:
- Clemens Kool, 2006. "Financial Stability in European Banking: The Role of Common Factors," Open Economies Review, Springer, vol. 17(4), pages 525-540, December.
- 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.
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
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-EEC-2007-03-10 (European Economics)
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