Risk Diversification by European Financial Conglomerates

Abstract

We study the dependence between the downside risk of European banks and insurers. Since the downside risk of banks and insurers di¤ers, an interesting question from a supervisory point of view is the risk reduction that derives from diversi…cation within large banks and …nancial conglomerates. We discuss the limited value of the normal distribution based correlation concept, and propose an alternative measure which better captures the downside dependence given the fat tail property of the risk distribution. This measure is estimated and indicates better diversi…cation bene…ts for conglomerates versus large banks.

Contagion risk in the Australian banking and property sectors

“…For the full sample period, we set the number of order statistics used equal to 50, as at this level the Hill-estimators are relatively stable. This threshold level compares nicely to the 50 order statistics used by Slijkerman et al (2005) on a similar data sample size as well as the 2% threshold level used by Poon et al (2004, p. 593).…”

Forecasting the fragility of the banking and insurance sectors

“…doi:10.1016/j.jbankfin.2010.10.024 there is potential channel for spill-overs to the banking sector via ownership. Slijkerman et al (2005) show that the cross-sectoral tail-dependence between banks' and insurances' equity prices is lower than the within-sector equity tail-dependence.…”

Forecasting the Fragility of the Banking and Insurance Sector

“…However, they find evidence of a reaction from bancassurers' equity prices to life insurance events, which suggest that there is potential channel for spill-overs to the banking sector via ownership. Slijkerman, Schoenmaker and de Vries (2005) show that the cross-sectoral tail-dependence between banks' and insurances' equity prices is lower than the within-sector equity tail-dependence.…”