Portfolio choice of financial investors and European business cycle convergence: a panel analysis for EU countries

Belke, Ansgar; Schneider, Jennifer

doi:10.1007/s10663-011-9181-4

Cited by 6 publications

(1 citation statement)

References 22 publications

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“…The existence of financial regulation at national level provides governments with the means to pursue their own national interests. Also noteworthy is the home bias in the private investors portfolio (Belke and Schneider (2013)) which aggravates this problem further. Neighborhood effects, close connectedness with certain countries and cross country differences in bailout strategy also motivate the monitoring of bank risk at country level.…”

Section: Introductionmentioning

confidence: 99%

Bank risk behavior and connectedness in EMU countries

Singh

Gómez‐Puig

Sosvilla‐Rivero

2015

Journal of International Money and Finance

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Highlights1. We estimate the banking sector risk behavior in EMU over the period 2004Q4-2013Q2; 2. We compute average "Distance-to-default (DtD)" for a representative set of banks at country level;3. Average DtD is strongly correlated with market sentiments and outperform regulatory risk measures; 4. GC test reveal no systemic component and Diebold-Yilmaz index suggest low connectedness; 5. Results suggest more cautious requirement in modeling a priori dependence among bank. Abstract Comment [E1]:Author: Two different versions of Abstracts were provided and the one in the ms has been retained. Please check that is correct.Given the structural differences in banking sector and financial regulation at country level in European Economic and Monetary Union (EMU), this paper tries to estimate the banking sector risk behavior at country level. Based on contingent claim literature, it computes "Distance-to-default (DtD)" at bank level and analyses the aggregate series at country level for a representative set of banks over the period 2004-Q4 to 2013-Q2. The indices provide an intuitive, forward-looking and timely risk measure having strong correlations with national/regional market sentiment indicators. An underlying trend exists but causality tests suggest no systemic component. Cross-sectional differences in DtD suggests fragility in EMU countries 12-18 months prior to the crisis and better predictive ability than the regulatory index based on large and complex banking institutions at European level. Furthermore, we explore the reasons for this divergence using VAR estimates.JEL: G01 G13 G21 G28 IntroductionThe 2007-08 financial crisis and the subsequent European sovereign debt crisis have exacerbated the need to understand and monitor the bank risk behavior. Renewed attention is being focused at the global scale to enhance and extend risk measurement methodologies. The eurozone is no exception and the twin objective of the European Central Bank (ECB) -price and financial system stability -places a strong emphasis on Systemically Important Financial Institutions (SIFI) but relies on individual countries' central banks to supervise smaller financial institutions.This paper deviates from this current and in our view excessive focus and attention on detecting and monitoring risk at European banking level. We take a step backward and introduce a micro approach to document and monitor the buildup of banking sector risk at country level. Based on contingent claims literature, we calculate Distance-to-default (DtD) at bank level and analyze the aggregate series at country level for a representative set of banks over the period 2004-Q4 to 2013-Q2.Conceivably, if regulators pay greater attention to country-specific buildups of risk and their connectedness, they might take actions earlier to mitigate the extent and impact of future crisis.There are many reasons for this choice. First, the structure of the banking sector within EMU countries varies considerably. In the case of Germany, Finland and the Netherlands, total banking ...

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Section: Introductionmentioning

confidence: 99%

Bank risk behavior and connectedness in EMU countries

Singh

Gómez‐Puig

Sosvilla‐Rivero

2015

Journal of International Money and Finance

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Are future enlargement candidate countries converging with the EU?

Kollias

Messis

2019

Empirica

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Bank Risk Behavior and Connectedness in EMU Countries

2015

View full text Add to dashboard Cite

Given the structural differences in banking sector and financial regulation at national level in EMU, this paper tries to estimate the banking sector risk behavior at country level. Based on contingent claim literature, it computes "Distance-to-default (DtD)" at bank level and analyses the aggregate series at country level for a representative set of banks over the period 2004-Q4 to 2013-Q2. The indices provide an intuitive, forward-looking and timely risk measure having strong correlations with national/regional market sentiment indicators. An underlying trend exists but causality tests suggest no systemic component. Cross-sectional differences in DtD suggests fragility in EMU countries 12-18 months prior to the crisis and better predictive ability than the regulatory index based on large and complex banking institutions at European level. Furthermore, we explore the reasons for this divergence using VAR estimates.

show abstract

Portfolio choice of financial investors and European business cycle convergence: a panel analysis for EU countries

Cited by 6 publications

References 22 publications

Bank risk behavior and connectedness in EMU countries

Bank risk behavior and connectedness in EMU countries

Are future enlargement candidate countries converging with the EU?

Bank Risk Behavior and Connectedness in EMU Countries

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