City Research Online

Bank credit risk events and peers' equity value

Fuertes, A-M. ORCID: 0000-0001-6468-9845 and Robles, M-D. (2021). Bank credit risk events and peers' equity value. International Review of Financial Analysis, 75, 101668. doi: 10.1016/j.irfa.2021.101668

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.

Publication Type: Article
Additional Information: © 2021. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
Publisher Keywords: Credit Risk Events; Credit Default Swaps; Equity value; European banking; Cross transmission; Wake-up Call
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
H Social Sciences > HG Finance
Departments: Bayes Business School > Finance
Date available in CRO: 04 Mar 2021 12:58
Date deposited: 4 March 2021
Date of acceptance: 30 December 2020
Date of first online publication: 24 February 2021
URI: https://openaccess.city.ac.uk/id/eprint/25749
[img] Text - Accepted Version
This document is not freely accessible until 24 August 2022 due to copyright restrictions.
Available under License Creative Commons Attribution Non-commercial No Derivatives.

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