Systemic Risk in European Banking: Evidence from Bivariate GARCH Models

Martin Schüler and Michael Schröder

No 03-11, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

Abstract: This paper attempts to assess the Europe-wide systemic risk in banking. We employ a bivariate GARCH model to estimate conditional correlations between European bank stock indices. These correlations are used as an indication for the interdependencies amongst the banking business in Europe and hence for the systemic risk potential. We employ several tests to assess the development of systemic risk: a non-parametric test of constancy of the correlation, a test of parallel shifts in the correlation at pre-specified events, and a test for a linear time trend in the correlations. The results show that many of the conditional correlations exhibit an upward move in the last years. This is an indication that the economic factors determining the European banking business have become more similar and that the systemic risk potential has increased.

Keywords: systemic risk; banking; contagion; Europe; bivariate GARCH (search for similar items in EconPapers)
JEL-codes: F34 G15 G21 (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:zewdip:956

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