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Extreme Spillover Between Shadow Banking and Regular Banking

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  • Paraschiv, Florentina

    ()

  • Qin, Minzi

    ()

Abstract

The current financial crisis brought light to a large banking sector that existed for decades within the “darkness” of the financial system - the shadow banking sector. Shadow bank assets are widely traded in the financial markets and shadow banking activities are intertwined with the daily business of regular banks. This unregulated banking sector has become systematically important. Its failure affected the entire banking system. We present a model based on multivariate extreme value theory, which allows us to measure crashes and liquidity squeezes. Using the stable tail dependence structure, we measure the interdependency between the tail probabilities of the regular banking sector and the shadow banking sector. This allows us to calculate the conditional spillover likelihood between asset returns and liquidity spreads for selected crash levels. The empirical results indicate a fairly strong contagion probability between shadow bank assets and regular bank assets.

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File URL: http://www1.vwa.unisg.ch/RePEc/usg/sfwpfi/WPF-1312.pdf
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Bibliographic Info

Paper provided by University of St. Gallen, School of Finance in its series Working Papers on Finance with number 1312.

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Length: 30 pages
Date of creation: Jul 2013
Date of revision:
Handle: RePEc:usg:sfwpfi:2013:12

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  1. Nicola Gennaioli, 2012. "A Model of Shadow Banking," 2012 Meeting Papers 89, Society for Economic Dynamics.
  2. Daniel Covitz & Nellie Liang & Gustavo A. Suarez, 2013. "The Evolution of a Financial Crisis: Collapse of the Asset-Backed Commercial Paper Market," Journal of Finance, American Finance Association, vol. 68(3), pages 815-848, 06.
  3. Viral V. Acharya & Philipp Schnabl & Gustavo Suarez, 2010. "Securitization without risk transfer," NBER Working Papers 15730, National Bureau of Economic Research, Inc.
  4. William Cheung & Scott Fung & Shih-Chuan Tsai, 2010. "Global capital market interdependence and spillover effect of credit risk: evidence from the 2007-2009 global financial crisis," Applied Financial Economics, Taylor & Francis Journals, vol. 20(1-2), pages 85-103.
  5. Longstaff, Francis A., 2010. "The subprime credit crisis and contagion in financial markets," Journal of Financial Economics, Elsevier, vol. 97(3), pages 436-450, September.
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