How the euro-area sovereign-debt crisis led to a collapse in bank equity prices

Heather Gibson, Stephen Hall and George Tavlas

Journal of Financial Stability, 2016, vol. 26, issue C, 266-275

Abstract: We quantify the linkages among banks’ equity performance and indicators of sovereign stress by using panel GMM to estimate a three-equation system that examines the impact of sovereign stress, as reflected in both sovereign spreads and sovereign ratings, on bank share prices. We use data for a panel of five euro-area stressed countries. Our findings indicate that a recursive relationship between sovereigns and banks operated during the euro-area crisis. Specifically, for the five crisis countries considered shocks to sovereign spreads fed-through to sovereign ratings, which affected commercial banks’ equity-prices. Our results also point to the importance of using levels of equity prices – rather than rates of return – in measuring banks’ performance. The use of levels allows us to derive the determinants of long-run equity prices.

Keywords: Euro-area financial crisis; Sovereign-bank linkages; Banks’ performance; Banking stability (search for similar items in EconPapers)
JEL-codes: E3 G01 G14 G21 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (15)

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Related works:
Working Paper: How the Euro-Area Sovereign-Debt Crisis Led to a Collapse in Bank Equity Prices (2015)
Working Paper: How the Euro-Area Sovereign-Debt Crisis Led to a Collapse in Bank Equity Prices (2015)
Working Paper: How the Euro-Area Sovereign-Debt Crisis Led to a Collapse in Bank Equity Prices (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:26:y:2016:i:c:p:266-275

DOI: 10.1016/j.jfs.2016.07.010

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