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Abstract
Compared with the broad supply of theoretical approaches towards systemic risk in (international) banking systems empirical contributions measuring its degree or potential triggering factors are rather scarce. Kwast and de Nicolo (Citation2002) put systemic risk and (conditional) stock price correlations into a unique relation. Adopting this perspective, we provide a dynamic conditional correlation (DCC, Engle, Citation2002) analysis for the European banking sector. Our sample period covers establishment and advent of the Euro. Apart from time variation of correlation measures we investigate the content of exogenous factor variables to explain correlation patterns. Overall, we find a moderate and stable average level of systemic risk in European banking. The advent of the Euro came along with a 1-year period of short-run transition dynamics. Systemic risk is found to increase over states of high uncertainty in national stock markets and states of small-to-medium variation in European interest rates.
Notes
1 We also investigated a panel comprising additionally Greece, Italy, Austria, Poland, Portugal, Sweden, Spain and the Czech Republic. Due to data availability, this cross section of time series could only be analysed for the period beginning with 28 July 1994. Since inferential conclusions for both cross sections are quite similar, we only present empirical results for the panel having a substantially larger time dimension. Estimation results for the extended set of countries are available from the authors on request.
2 BEL20, OMXH25, CAC40, DAX30, ISEQ, AEX, OMX20, FTSE100 and SWITZ-DS.
3 We performed all empirical analyses also for an unweighted correlation index and obtained qualitatively identical conclusions as for the weighted index.
4 Market capitalizations are drawn from the World Federation of Exchanges, http://world-exchanges.org
5 Detailed results of CAPM – and univariate-GARCH models, are available from the authors on request.