English, Article, Journal or magazine article edition: Financial Stability in European Banking: The Role of Common Factors Clemens J.M. Kool

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Bookmark: http://trove.nla.gov.au/version/34372
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Financial Stability in European Banking: The Role of Common Factors
Author
  • Clemens J.M. Kool
Physical Description
  • preprint
Notes
  • In this paper, I investigate the development and determinants of CDS spreads for 18 major European banks between December 2001 and January 2004 using daily data. I demonstrate that two nonstationary common factors can be extracted from the data that together explain most CDS spread variation across time and across banks. The group of German banks plus a few Southern-European banks appear to systematically have high CDS spreads and to be relatively sensitive to changes in the underlying factors. The dominating first common factor impacts on all banks in a similar direction, suggesting strong market integration. However, the quantitatively less important second factor has opposite effects on credit spreads of Southern European versus Northern European banks, suggesting some remaining country-specific or region-specific credit risk. Finally, I show that the first common factor may indeed be interpreted as a measure of market conditions as it is cointegrated with the European P/​E ratio and the 2-year nominal interest rate
  • credit default swap spreads, contagion, cointegration, factor analysis
  • RePEc:mmf:mmfc06:101
Language
  • English
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