Too Connected to Fail? Inferring Network Ties From Price Co-Movements

Jakob J. Bosma, Michael Koetter and Michael Wedow

Journal of Business & Economic Statistics, 2019, vol. 37, issue 1, 67-80

Abstract: We use extreme value theory methods to infer conventionally unobservable connections between financial institutions from joint extreme movements in credit default swap spreads and equity returns. Estimated pairwise co-crash probabilities identify significant connections among up to 186 financial institutions prior to the crisis of 2007/2008. Financial institutions that were very central prior to the crisis were more likely to be bailed out during the crisis or receive the status of systemically important institutions. This result remains intact also after controlling for indicators of too-big-to-fail concerns, systemic, systematic, and idiosyncratic risks. Both credit default swap (CDS)-based and equity-based connections are significant predictors of bailouts. Supplementary materials for this article are available online.

Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:taf:jnlbes:v:37:y:2019:i:1:p:67-80

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DOI: 10.1080/07350015.2016.1272459

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