Bank Credit Risk Events and Peers’ Equity Value

61 Pages Posted: 14 Jul 2020 Last revised: 3 Mar 2021

See all articles by Ana-Maria Fuertes

Ana-Maria Fuertes

Cass Business School, City University of London

M-Dolores Robles

Universidad Complutense de Madrid (UCM) - Faculty of Economics and Business Administration; ICAE

Date Written: June 19, 2020

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

JEL Classification: C13; C58; G14; G20

Suggested Citation

Fuertes, Ana-Maria and Robles Fernandez, María-Dolores, Bank Credit Risk Events and Peers’ Equity Value (June 19, 2020). International Review of Financial Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3631171 or http://dx.doi.org/10.2139/ssrn.3631171

Ana-Maria Fuertes (Contact Author)

Cass Business School, City University of London ( email )

Faculty of Finance
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 207 477 0186 (Phone)
+44 207 477 8881 (Fax)

HOME PAGE: http://www.city.ac.uk/people/academics/ana-maria-fuertes

María-Dolores Robles Fernandez

Universidad Complutense de Madrid (UCM) - Faculty of Economics and Business Administration ( email )

School of Business Administration
Somosaguas Campus
Madrid, Madrid 28223
Spain
+91 394 2347 (Phone)
+91 394 2613 (Fax)

HOME PAGE: http://https://www.ucm.es/fundamentos-analisis-economico2/MDRF

ICAE ( email )

Campus de Somosaguas
Madrid, 28223
Spain

HOME PAGE: http://https://www.ucm.es/fundamentos-analisis-economico2/MDRF

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
23
Abstract Views
231
PlumX Metrics