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 bankÕs CDS spread to the first common factor differs substantially, probably reflecting differences in individual bankÕs 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: 18 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.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
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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