Kiel Working Papers, Kiel Institute for World Economics
No 1667:
Contagion Between European and US Banks: Evidence from Equity Prices
Daniel Fricke
Abstract: This paper employs an Extreme Value Theory framework to
investigate the existence of contagion between European and US banks. The
fact that many regulators have no detailed data sets about interbank
cross-exposures raises the necessity of finding market-based indicators in
order to analyze the effects of crises and to quantify the risk of
contagion. The Distance-to-default (DD) measure is being employed as an
indicator of banks' soundness. Focusing on the negative tail of the daily
percentage changes of the DD, a country-specific indicator variable labeled
"Coexceedances" is built measuring the number of banks simultaneously
experiencing a large shock on a given day. Based on a multinomial logit
model, for each country the probability of observing several banks in the
tail is estimated. Controlling for common factors and including foreign
countries' lagged coexceedances allows to interpret significant
coefficients of foreign lagged coexceedances as contagion. The main finding
is that there is significant bi-lateral contagion between European and US
banks. Furthermore the existence of contagion between European banks is
verified by the underlying data set
Keywords: Banking, Contagion, Distance-to-default, Multinomial logit; (follow links to similar papers)
JEL-Codes: F36,; G15,; G21; (follow links to similar papers)
65 pages, December 2010
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