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Network linkages to predict bank distress

Tuomas Peltonen (), Peter Sarlin and Andreea Piloiu

No 1828, Working Paper Series from European Central Bank

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 with- out 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. JEL Classification: G21, G33, C54, D85

Keywords: bank distress; bank networks; systemic risk (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-net and nep-rmg
Date: 2015-07
Note: 355041
References: View references in EconPapers View complete reference list from CitEc
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