Financial Stability in European Banking: The Role of Common Factors

C.J.M. Kool

Research output: Working paperAcademic

Abstract

In this paper, I investigate the development and determinants of CDS spreads for 18 major European banks between December 2001 and January 2004 applying factor analysis to daily data. Two clear-cut conclusions can be drawn. First, the dominating first common factor that explains 88 percent of all variation in the system, impacts on all banks in a similar direction. This suggests a strong market integration. However the size of the response of each bank’s CDS spread to the first common factor differs substantially, probably reflecting differences in individual bank’s exposure and riskiness. Second, the first common factor appears significantly related to the European P/E ratio and the European-wide 2-year nominal interest rate. This finding suggests that the common factor may be interpreted as a general indicator of market conditions.
Original languageEnglish
Place of PublicationUtrecht
PublisherUU USE Tjalling C. Koopmans Research Institute
Number of pages18
Publication statusPublished - Jun 2006

Publication series

NameDiscussion Paper Series / Tjalling C. Koopmans Research Institute
No.13
Volume06
ISSN (Electronic)2666-8238

Keywords

  • Credit Default Swap Spreads
  • Risk Premium
  • Financial Integration

Fingerprint

Dive into the research topics of 'Financial Stability in European Banking: The Role of Common Factors'. Together they form a unique fingerprint.

Cite this