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Bank Credit Risk Events and Peers’ Equity Value

Ana-Maria Fuertes () and M. Dolores Robles Fernandez ()

No 2021-06, Documentos de Trabajo del ICAE from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico

Abstract: This paper documents a negative cross-transmission of bank-idiosyncratic credit risk events to the equity value of peers comprising other banks, insurance and real estate firms inter alia. Large jumps in the idiosyncratic component of bank CDS spreads significantly reduce the equity value of peers, particularly on the event day. The negative externality does not hinge on the “information connectedness” between the two entities as proxied by characteristics such as common core line of business, common country or region, and inter-country common legal tradition. The negative externality is stronger in turmoil market conditions when risk-aversion levels are higher and/or investors are subject to pessimism. The more fragile the risk profile of the event bank and peer firm prior to the event the stronger the cross-transmission. The findings lend support to the wake-up call paradigm at micro level, and are insightful towards a better assessment of the vulnerability of the financial system.

Keywords: Credit Risk Events; Credit Default Swaps; Equity value; European banking; Cross-transmission; Wake-up Call. (search for similar items in EconPapers)
JEL-codes: C13 C58 G14 G20 (search for similar items in EconPapers)
Pages: 62 pages
Date: 2021-03
New Economics Papers: this item is included in nep-ban and nep-rmg
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