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Do information contagion and business model similarities explain bank credit risk commonalities?

Dieter Wang, Iman Lelyveld and Julia Schaumburg

DNB Working Papers from Netherlands Central Bank, Research Department

Abstract: This paper revisits the credit spread puzzle in bank CDS spreads from the perspective of information contagion. The puzzle, rst detected in corporate bonds, consists of two stylized facts: Structural determinants of credit risk not only have low explanatory power but also fail to capture a systematic common factor in the residuals (Collin-Dufresne et al., 2001). For the case of banks, we hypothesize that the puzzle exists because of omitted network effects. We therefore extend the structural models to account for information spillovers based on bank business model similarities. To capture this channel, we propose and construct a new intuitive measure for portfolio overlap using the complete asset holdings of the largest banks in the Eurozone. Incorporating the network information into the structural model for bank credit spreads increases explanatory power and explains the systemic common factor in the residuals.

Keywords: Information contagion; credit spread puzzle; bank business model similarities; portfolio overlap measure; dynamic network effects model (search for similar items in EconPapers)
JEL-codes: G01 G21 C32 C33 C38 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-rmg
Date: 2018-12
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Working Paper: Do information contagion and business model similarities explain bank credit risk commonalities? (2018) Downloads
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