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Extreme Stock Return Co-movements of Financial Institutions: Contagion or Interdependence?

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  • Koen Minderhoud

Abstract

This paper investigates contagion of major financial institutions by focusing on extreme stock return co-movements. Our measure of contagion within banking and insurance sectors is the number of coincidences of daily extreme returns that cannot be explained by a linear propagation model of constant correlation. Using a Monte Carlo simulation experiment, we find evidence of contagion for the US, Germany and the UK. This result is stronger for the insurance sector than for the banking sector. In addition, we investigate extreme co-movements among banking and insurance sectors using a multinomial logistic regression model. We find evidence of contagion, even if we control for a number of macroeconomic fundamentals. This indicates that insurance companies are important for the well-functioning of the financial system.

Suggested Citation

  • Koen Minderhoud, 2003. "Extreme Stock Return Co-movements of Financial Institutions: Contagion or Interdependence?," MEB Series (discontinued) 2003-16, Netherlands Central Bank, Monetary and Economic Policy Department.
  • Handle: RePEc:dnb:mebser:2003-16
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    File URL: https://www.dnb.nl/binaries/serie2003-16_tcm46-147345.pdf
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    Cited by:

    1. G. Hauton & J.-C. Héam, 2014. "How to Measure Interconnectedness between Banks, Insurers and Financial Conglomerates?," Débats économiques et financiers 15, Banque de France.
    2. Henriëtte Prast & Iman van Lelyveld, 2004. "New Architectures in the Regulation and Supervision of Financial Markets and Institutions: The Netherlands," DNB Working Papers 021, Netherlands Central Bank, Research Department.
    3. Gaël Hauton & Jean-Cyprien Héam, 2015. "Interconnectedness of Financial Conglomerates," Risks, MDPI, Open Access Journal, vol. 3(2), pages 1-25, May.
    4. Ivan Alves & Jeroen Brinkhoff & Stanislav Georgiev & Jean-Cyprien Héam & Iulia Moldovan & Marco Scotto di Carlo, 2015. "Network analysis of the EU insurance sector," ESRB Occasional Paper Series 07, European Systemic Risk Board.

    More about this item

    Keywords

    banks; contagion; extreme co-movements; extreme stock returns; financial institutions; insurance companies; systemic risk;

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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