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Bank fragility and contagion: Evidence from the bank CDS market

Author

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  • Ballester, Laura
  • Casu, Barbara
  • González-Urteaga, Ana

Abstract

Understanding how contagion works among financial institutions is a top priority for regulators and policy makers who aim to foster financial stability and to prevent financial crises. Using bank credit default swap (CDS) data, we provide a framework for the evaluation of contagion among banks in different countries and regions during a period of prolonged financial distress. We measure contagion in terms of return spillovers, following a Generalized VAR (GVAR) approach. In addition, we propose an innovative framework to distinguish between two types of contagion: systematic (linked to global factors), and idiosyncratic (linked to bank specific factors). We find evidence of both types of contagion, although the spillover dynamics changed over time. Our measure of systematic contagion is always greater than the idiosyncratic component, thus highlighting the importance of common factors in the propagation of risk spillovers. This indicates that international linkages among banking markets are central to the transmission of shocks.

Suggested Citation

  • Ballester, Laura & Casu, Barbara & González-Urteaga, Ana, 2016. "Bank fragility and contagion: Evidence from the bank CDS market," Journal of Empirical Finance, Elsevier, vol. 38(PA), pages 394-416.
  • Handle: RePEc:eee:empfin:v:38:y:2016:i:pa:p:394-416
    DOI: 10.1016/j.jempfin.2016.01.011
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    1. repec:eee:riibaf:v:43:y:2018:i:c:p:79-89 is not listed on IDEAS
    2. repec:eee:finana:v:55:y:2018:i:c:p:35-49 is not listed on IDEAS
    3. Ballester, Laura & González-Urteaga, Ana, 2017. "How credit ratings affect sovereign credit risk: Cross-border evidence in Latin American emerging markets," Emerging Markets Review, Elsevier, vol. 30(C), pages 200-214.
    4. Javier Ojea Ferreiro, 2018. " Contagion spillovers between sovereign and financial European sector from a Delta CoVaR approach," Documentos de Trabajo del ICAE 2018-12, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    5. Kräussl, Roman & Lehnert, Thorsten & Stefanova, Denitsa, 2016. "The European sovereign debt crisis: What have we learned?," Journal of Empirical Finance, Elsevier, vol. 38(PA), pages 363-373.
    6. repec:eee:intfin:v:52:y:2018:i:c:p:114-133 is not listed on IDEAS
    7. Samargandi, Nahla & Kutan, Ali M., 2016. "Private credit spillovers and economic growth: Evidence from BRICS countries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 44(C), pages 56-84.

    More about this item

    Keywords

    Credit default swaps; Contagion; GVAR; Spillover indices; Financial stability;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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