Do information contagion and business model similarities explain bank credit risk commonalities?
Iman Lelyveld and
Julia Schaumburg ()
No 94, ESRB Working Paper Series from European Systemic Risk Board
This paper revisits the credit spread puzzle for banks from the perspective of information contagion. The puzzle consists of two stylized facts: Structural determinants of credit risk not only have low explanatory power but also fail to capture common factors in the residuals. We reproduce the puzzle for European bank credit spreads and hypothesize that the puzzle exists because structural models ignore contagion effects. We therefore extend the structural approach to include information contagion through bank business model similarities. To capture this channel, we propose an intuitive measure for portfolio overlap and apply it to the complete asset holdings of the largest banks in the Eurozone. Incorporating this unique network information into the structural model increases explanatory power and removes a systemic common factor from the residuals. Furthermore, neglecting the network likely overstates the importance of structural determinants. JEL Classification: G01, G21, C32, C33, C38
Keywords: bank business model similarities; credit spread puzzle; dynamic network effects model.; information contagion; portfolio overlap measure (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-bec, nep-eec and nep-rmg
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Working Paper: Do information contagion and business model similarities explain bank credit risk commonalities? (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:srk:srkwps:201994
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