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Forward looking banking stress in EMU countries

Manish K. Singh (), Marta Gómez-Puig () and Simon Sosvilla-Rivero ()
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Manish K. Singh: Department of Economic Theory, Universitat de Barcelona

No 14-10, Working Papers from Asociación Española de Economía y Finanzas Internacionales

Abstract: Based on contingent claims analysis(CCA), this paper tries to estimate the systemic risk build-up in the European Economic and Monetary Union (EMU) countries using a market based measure "distance-to-default"(DtD). It analyzes the individual and aggregated series for a comprehensive set of banks in each eurozone country over the period 2004-Q4 to 2013-Q2. Given the structural differences in financial sector and banking regulations at national level, the indices provide a useful indicator for monitoring country specific banking vulnerability and stress. We find that average DtD indicators are intuitive, forward-looking and timely risk indicators. The underlying trend, fluctuations and correlations among indices help us analyze the interdependence while cross-sectional differences in DtD prior to crisis suggest banking sector fragility in peripheral EMU countries.

Keywords: contingent claim analysis; distance-to-default; systemic risk (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2014-10
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec and nep-rmg
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