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Industry characteristics and financial risk contagion

Wan-Chien Chiu, Juan Ignacio Peña and Chih-Wei Wang

Journal of Banking & Finance, 2015, vol. 50, issue C, 411-427

Abstract: This article proposes a new measure of tail risk spillover: the conditional coexceedance (CCX), defined as the number of joint occurrences of extreme negative returns in an industry, conditional on an extreme negative return in the financial sector. The empirical application provides evidence of significant volatility and tail risk spillovers from the financial sector to many real sectors in the U.S. economy from 2001 to 2011. These spillovers increase in crisis periods. The CCX in a given sector is positively related to its amount of debt financing and negatively related to its valuation and investment. Therefore, real economy sectors—which require relatively high debt financing and whose value and investment activity are relatively lower—are prime candidates for stock price volatility and depreciation in the wake of a financial sector crisis. Evidence also suggests that the higher the industry’s degree of competition, the stronger the tail risk spillover from the financial sector.

Keywords: Volatility spillover; Tail risk; Conditional coexceedance; Debt financing; Valuation; Investment (search for similar items in EconPapers)
JEL-codes: G00 G01 G18 C33 C36 (search for similar items in EconPapers)
Date: 2015
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Handle: RePEc:eee:jbfina:v:50:y:2015:i:c:p:411-427