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Network linkages to predict bank distress

Andreea Constantin, Tuomas A. Peltonen and Peter Sarlin

Journal of Financial Stability, 2018, vol. 35, issue C, 226-241

Abstract: Building on the literature on systemic risk and financial contagion, the paper introduces estimated network linkages into an early-warning model to predict bank distress among European banks. We use multivariate extreme value theory to estimate equity-based tail-dependence networks, whose links proxy for the markets’ view of bank interconnectedness in case of elevated financial stress. The paper finds that early warning models including estimated tail dependencies consistently outperform bank-specific benchmark models without networks. The results are robust to variation in model specification and also hold in relation to simpler benchmarks of contagion. Generally, this paper gives direct support for measures of interconnectedness in early-warning models, and moves toward a unified representation of cyclical and cross-sectional dimensions of systemic risk.

Keywords: Bank distress; Bank networks; Systemic risk (search for similar items in EconPapers)
JEL-codes: G21 G33 C54 D85 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:35:y:2018:i:c:p:226-241

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