Contagion Risk for Australian Authorised Deposit-Taking Institutions

Selim Akhter and Mohammad Z. Hasan

The Economic Record, 2015, vol. 91, issue 293, 191-208

Abstract: type="main" xml:id="ecor12177-abs-0001">

This paper investigates the contagion risk for Australian-owned authorised deposit-taking institutions (ADIs) spilling from the US and UK banks. We hypothesised that Australian ADIs are prone to extreme shocks experienced by their US and UK counterparts. We define four discrete events for the Australian banking sector in terms of the number of banks exceeding an extreme value at some time. The extreme value is defined as the 90th percentile on the negative tail of the distribution of changes in the distance to default obtained through the Black–Scholes–Merton formula. Then we fit a multinomial logistic model (MLM) to relate these events to the number of exceedances (extreme events) occurring in the US and the UK in the previous day for the time period from September 2006 to September 2011. The MLM estimates reveal strong contagion effects for Australian ADIs from the US and UK banks.

Date: 2015
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