Bank Credit Risk Events and Peers’ Equity Value

  1. Ana-Maria Fuertes 1
  2. Maria-Dolores Robles 2
  1. 1 Professor of Finance and Econometrics, Cass Business School, City, University of London, ECIY
  2. 2 Associate Professor of Finance and Econometrics, Universidad Complutense de Madrid (UCM)
Revue:
Documentos de Trabajo (ICAE)

ISSN: 2341-2356

Année de publication: 2021

Número: 6

Pages: 1-62

Type: Working Paper

D'autres publications dans: Documentos de Trabajo (ICAE)

Résumé

This paper documents a negative cross-transmission of bank-idiosyncratic credit risk events to the equity value of peers comprising other banks, insurance and real estate firms inter alia. Large jumps in the idiosyncratic component of bank CDS spreads significantly reduce the equity value of peers, particularly on the event day. The negative externality does not hinge on the “information connectedness” between the two entities as proxied by characteristics such as common core line of business, common country or region, and inter-country common legal tradition. The negative externality is stronger in turmoil market conditions when risk-aversion levels are higher and/or investors are subject to pessimism. The more fragile the risk profile of the event bank and peer firm prior to the event the stronger the cross-transmission. The findings lend support to the wake-up call paradigm at micro level, and are insightful towards a better assessment of the vulnerability of the financial system.

Références bibliographiques

  • Abad, P., Ferreras, R. & Robles, M.-D. (2020). Intra-industry transfer effects of credit risk news: Rated versus unrated rivals. The British Accounting Review, 52, 1-19.
  • Acharya, V. & Yorulmazer, T. (2008). Information contagion and bank herding. Journal of Money, Credit & Banking 40, 215–231.
  • Aharony, J. & Swary, I. (1996). Additional evidence on the information-based contagion effects of bank failures. Journal of Banking & Finance 20, 57–69.
  • Ahnert, T. & Bertsch, C. (2015). A wake-up call theory of contagion. Sveriges Riksbank Working Paper Series No. 294.
  • Akhigbe, A., Madura, J., & Martin, A. D. (2015). Intra-industry effects of negative stock price surprises. Review of Quantitative Finance and Accounting, 45(3), 541-559.
  • Allen, F., Chui, M. K. & Maddaloni, A. (2004). Financial Systems in Europe, the USA, and ASIA. Oxford Review of Economic Policy 20, 490–508.
  • Aruoba, S. B., Diebold, F. X. & Scotti, C. (2009). Real-time measurement of business conditions. Journal of Business & Economic Statistics 27, 417–427.
  • Audzeyeva, A. & Fuertes, A.-M. (2018). On the predictability of emerging market sovereign credit spreads. Journal of International Money & Finance 88, 140-157.
  • Baker, M. & Wurgler, J. (2007). Investor sentiment in the stock market. Journal of Economic Perspectives 21, 129–152.
  • Baur, D. G. (2012). Financial contagion and the real economy. Journal of Banking & Finance 36, 2680–2692.
  • Bekaert, G., Ehrmann, M., Fratzscher, M. & Mehl, A. (2014). The global crisis and equity market contagion. Journal of Finance 69, 2597–2649.
  • Bethke, S., Gehde-Trapp, M. & Kempf, A. (2017). Investor sentiment, flight-to-quality, and corporate bond comovement. Journal of Banking & Finance 82, 112–132.
  • Cai, C. X., Mobarek, A. & Zhang, Q. (2017). International stock market leadership and its determinants. Journal of Financial Stability 33, 150–162.
  • Coval, J. D. & Moskowitz, T. J. (2001). The geography of investment: Informed trading and asset prices. Journal of Political Economy 109, 811–841.
  • Da, Z., Engelberg, J. & Gao, P. (2015). The Sum of All FEARS Investor Sentiment and Asset Prices. Review of Financial Studies 28, 1–32.
  • Daniel, K., Hirshleifer, D. & Subrahmanyam, A. (1998). Investor Psychology and Security Market Underand Overreactions. Journal of Finance 53, 1839–1885.
  • Dasgupta, A. (2004). Financial contagion through capital connections: a model of the origin and spread of bank panics. Journal of the European Economic Association 2, 1049–1084.
  • Ferreira, M. A. & Laux, P. A. (2007). Corporate governance, idiosyncratic risk, and information flow. Journal of Finance 62, 951–989.
  • Forbes, K. (2012). The" Big C": identifying contagion. NBER Working Paper No. w18465.
  • Goldstein, M. (1998). The Asian financial crisis: Causes, cures, and systemic implications. Peterson Institute.
  • Grinblatt, M. & Keloharju, M. (2000). The investment behavior and performance of various investor types: A study of Finland's unique data set. Journal of Financial Economics 55, 43–67.
  • Guiso, L., Sapienza, P. & Zingales, L. (2009). Cultural biases in economic exchange? Quarterly Journal of Economics 124, 1095–1131.
  • Helwege, J. & Zhang, G. (2015). Financial firm bankruptcy and contagion. Review of Finance 20, 1321–1362.
  • Iannotta, G., Nocera, G. & Sironi, A. (2007). Ownership structure, risk and performance in the European banking industry. Journal of Banking & Finance 31, 2127–2149.
  • Jorion, P. & Zhang, G. (2007). Good and bad credit contagion: Evidence from credit default swaps. Journal of Financial Economics 84, 860–883.
  • Jorion, P. & Zhang, G. (2009). Credit contagion from counterparty risk. Journal of Finance 64, 2053–2087.
  • Jurado, K., Ludvigson, S. C. & Ng, S. (2015). Measuring uncertainty. American Economic Review 105, 1177–1216.
  • Karas, A., Pyle, W. & Schoors, K. (2013). Deposit insurance, banking crises, and market discipline: Evidence from a natural experiment on deposit flows and rates. Journal of Money Credit & Banking 24, 179–200.
  • Kenourgios, D. & Dimitriou, D. (2015). Contagion of the global financial crisis and the real economy: A regional analysis, Economic Modelling 44, 283-293.
  • Kenourgios, D., Samitas, A. & Paltalidis, A. (2011). Financial crises and stock market contagion in a multivariate time-varying asymmetric framework, Journal of International inancial Markets, Institutions & Money 21, 92-106.
  • Kiesel, F. & Spohnholtz, J. (2017), CDS spreads as an independent measure of credit risk, Journal of Risk Finance 18, 122–144
  • Kiesel, F., Kolaric, S. & Schiereck, D. (2016). Market integration and efficiency of CDS and equity markets. Quarterly Review of Economics & Finance 61, 209–229.
  • Laeven, M. L., Ratnovski, L. & Tong, H. (2016). Bank size and systemic risk. Some international evidence. Journal of Banking & Finance 69, S25–S34.
  • La Porta, R., Lopez-de Silanes, F. & Shleifer, A. (2008). The economic consequences of legal origins. Journal of Economic Literature 46, 285–332.
  • Ludwig, A. (2014). A unified approach to investigate pure and wake-up-call contagion: Evidence from the Eurozone's first financial crisis. Journal of International Money and Finance 48, 125–146.
  • Mayer, T. & Zignago, S. (2011). Notes on CEPII’s distances measures: The GeoDist database. SSRN Working Paper No. 1994531.
  • Mink, M. & De Haan, J. (2013). Contagion during the Greek sovereign debt crisis. Journal of International Money & Finance 34, 102–113.
  • Narayan, P. K., & Sharma, S. S. (2015). Does data frequency matter for the impact of forward premium on spot exchange rate?. International Review of Financial Analysis 39, 45-53.
  • Narayan, P. K., Ahmed, H. A., & Narayan, S. (2015). Do momentum‐based trading strategies work in the commodity futures markets?. Journal of Futures Markets 35, 868-891.
  • Nilsson, M. & Mattes, J. (2015). The spatiality of trust: Factors influencing the creation of trust and the role of face-to-face contacts. European Management Journal 33, 230-244.
  • Niţoi, M. & Pochea, M. M. (2020). Time-varying dependence in European equity markets: A contagion and investor sentiment driven analysis. Economic Modelling 86, 133-147
  • Okawa, Y. & Van Wincoop, E. (2012). Gravity in international finance. Journal of international Economics 87, 205-215.
  • Packer, F. & Zhu, H. (2005). Contractual terms and CDS pricing. Bank for International Settlements (BIS) Quarterly Review 503, 89-100.
  • Portes, R. & Rey, H. (2005). The determinants of cross-border equity flows. Journal of International Economics 65, 269–296.
  • Ricci, O. (2015). The impact of monetary policy announcements on the stock price of large European banks during the financial crisis. Journal of Banking & Finance 52, 245–255.
  • Saka, O. (2020). Domestic banks as lightning rods? Home bias and information during Eurozone crisis. Journal of Money, Credit and Banking 52, 273-205.
  • Saka, O., Fuertes, A.-M. & Kalotychou, E. (2015). ECB policy and Eurozone fragility: Was De Grauwe right? Journal of international Money & Finance 54, 168–185.
  • Schäfer, A., Schnabel, I. & Weder, B. (2016). Financial sector reform after the subprime crisis: Has anything happened? Review of Finance 20, 77–125.
  • Trutwein, P. Ramchander, S. & Schiereck, D. (2011). Jumps in credit default swap spreads and stock returns. Journal of Fixed Income 20, 56–70.
  • Van Rijckeghem, C. & Weder, B. (2003). Spillovers through banking centers: a panel data analysis of bank flows, Journal of International Money & Finance 22, 483–509.
  • Zhou, G. (2018). Measuring investor sentiment. Annual Review of Financial Economics 10, 239–259.