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Bank Credit Risk Events and Peers’ Equity Value

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  • Ana-Maria Fuertes

    (Cass Business School, City, University of London, ECIY.)

  • Maria-Dolores Robles

    (Universidad Complutense de Madrid (UCM).)

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.

Suggested Citation

  • Ana-Maria Fuertes & Maria-Dolores Robles, 2021. "Bank Credit Risk Events and Peers’ Equity Value," Documentos de Trabajo del ICAE 2021-06, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    • Handle: RePEc:ucm:doicae:2106
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    More about this item

    Keywords

    Credit Risk Events; Credit Default Swaps; Equity value; European banking; Cross-transmission; Wake-up Call.;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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