IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2401.03443.html
   My bibliography  Save this paper

Structured factor copulas for modeling the systemic risk of European and United States banks

Author

Listed:
  • Hoang Nguyen
  • Audron.e Virbickait.e
  • M. Concepci'on Aus'in
  • Pedro Galeano

Abstract

In this paper, we employ Credit Default Swaps (CDS) to model the joint and conditional distress probabilities of banks in Europe and the U.S. using factor copulas. We propose multi-factor, structured factor, and factor-vine models where the banks in the sample are clustered according to their geographic location. We find that within each region, the co-dependence between banks is best described using both, systematic and idiosyncratic, financial contagion channels. However, if we consider the banking system as a whole, then the systematic contagion channel prevails, meaning that the distress probabilities are driven by a latent global factor and region-specific factors. In all cases, the co-dependence structure of bank CDS spreads is highly correlated in the tail. The out-of-sample forecasts of several measures of systematic risk allow us to identify the periods of distress in the banking sector over the recent years including the COVID-19 pandemic, the interest rate hikes in 2022, and the banking crisis in 2023.

Suggested Citation

  • Hoang Nguyen & Audron.e Virbickait.e & M. Concepci'on Aus'in & Pedro Galeano, 2024. "Structured factor copulas for modeling the systemic risk of European and United States banks," Papers 2401.03443, arXiv.org.
    • Handle: RePEc:arx:papers:2401.03443
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/2401.03443
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Beirne, John & Fratzscher, Marcel, 2013. "The pricing of sovereign risk and contagion during the European sovereign debt crisis," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 60-82.
    2. Mario Cerrato & John Crosby & Minjoo Kim & Yang Zhao, 2017. "The joint credit risk of UK global‐systemically important banks," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 37(10), pages 964-988, October.
    3. Krupskii, Pavel & Joe, Harry, 2020. "Flexible copula models with dynamic dependence and application to financial data," Econometrics and Statistics, Elsevier, vol. 16(C), pages 148-167.
    4. Rutger-Jan Lange & Andre Lucas & Arjen H. Siegmann, 2016. "Score-Driven Systemic Risk Signaling for European Sovereign Bond Yields and CDS Spreads," Tinbergen Institute Discussion Papers 16-064/IV, Tinbergen Institute.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Buse, Rebekka & Schienle, Melanie, 2019. "Measuring connectedness of euro area sovereign risk," International Journal of Forecasting, Elsevier, vol. 35(1), pages 25-44.
    2. Peppel-Srebrny, Jemima, 2021. "Not all government budget deficits are created equal: Evidence from advanced economies' sovereign bond markets," Journal of International Money and Finance, Elsevier, vol. 118(C).
    3. Victor Echevarria Icaza & Simón Sosvilla-Rivero, 2017. "Yields on sovereign debt, fragmentation and monetary policy transmission in the euro area: A GVAR approach," Working Papers 17-01, Asociación Española de Economía y Finanzas Internacionales.
    4. Perego, Erica, 2020. "Sovereign risk and asset market dynamics in the euro area," Journal of International Money and Finance, Elsevier, vol. 109(C).
    5. Yang Liu & BRUCE MORLEY, 2013. "Sovereign Credit Ratings, The Macroeconomy And Credit Default Swap Spreads," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 56(3-4), pages 335-348.
    6. Laleh Tafakori & Armin Pourkhanali & Riccardo Rastelli, 2022. "Measuring systemic risk and contagion in the European financial network," Empirical Economics, Springer, vol. 63(1), pages 345-389, July.
    7. Gómez-Puig, Marta & Sosvilla-Rivero, Simón, 2014. "Causality and contagion in EMU sovereign debt markets," International Review of Economics & Finance, Elsevier, vol. 33(C), pages 12-27.
    8. Wegener, Christoph & Kruse, Robinson & Basse, Tobias, 2019. "The walking debt crisis," Journal of Economic Behavior & Organization, Elsevier, vol. 157(C), pages 382-402.
    9. Guidolin, Massimo & Pedio, Manuela, 2017. "Identifying and measuring the contagion channels at work in the European financial crises," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 48(C), pages 117-134.
    10. Eijffinger, S.C.W. & Kobielarz, M.L. & Uras, R.B., 2015. "Sovereign Debt, Bail-Outs and Contagion in a Monetary Union," Discussion Paper 2015-018, Tilburg University, Center for Economic Research.
    11. Shahzad, Syed Jawad Hussain & Nor, Safwan Mohd & Kumar, Ronald Ravinesh & Mensi, Walid, 2017. "Interdependence and contagion among industry-level US credit markets: An application of wavelet and VMD based copula approaches," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 466(C), pages 310-324.
    12. Ricci, Ornella, 2015. "The impact of monetary policy announcements on the stock price of large European banks during the financial crisis," Journal of Banking & Finance, Elsevier, vol. 52(C), pages 245-255.
    13. Amanjot Singh & Manjit Singh, 2018. "Co-movement among US, Frontier and BRIC Equity Markets after the Financial Crisis," Global Business Review, International Management Institute, vol. 19(2), pages 311-327, April.
    14. Hartwig, Benny & Meinerding, Christoph & Schüler, Yves S., 2021. "Identifying indicators of systemic risk," Journal of International Economics, Elsevier, vol. 132(C).
    15. Jean-Pierre Allegret & Hélène Raymond & Houda Rharrabti, 2014. "The impact of the global and eurozone crises on European banks stocks Some evidence of shift contagion," Working Papers hal-04141339, HAL.
    16. David Cronin, 2020. "Are Member States’ Budgetary Policies Adhering to the EU Fiscal Rules?," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot GmbH, Berlin, vol. 66(1), pages 47-64.
    17. Annika Westphal, 2015. "Systemic Risk in the European Union: A Network Approach to Banks’ Sovereign Debt Exposures," IJFS, MDPI, vol. 3(3), pages 1-36, July.
    18. Jamal Bouoiyour, Refk Selmi, 2019. "Brexit and CDS spillovers across UK and Europe," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 16(1), pages 105-124, June.
    19. Galariotis, Emilios C. & Makrichoriti, Panagiota & Spyrou, Spyros, 2016. "Sovereign CDS spread determinants and spill-over effects during financial crisis: A panel VAR approach," Journal of Financial Stability, Elsevier, vol. 26(C), pages 62-77.
    20. Gomez-Gonzalez, Jose E. & Valencia, Oscar M. & Sánchez, Gustavo A., 2022. "How fiscal rules can reduce sovereign debt default risk," Emerging Markets Review, Elsevier, vol. 50(C).

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:2401.03443. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.