TY - UNPB
T1 - Financial Stability in European Banking: The Role of Common Factors
AU - Kool, C.J.M.
PY - 2006/6
Y1 - 2006/6
N2 - 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.
AB - 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.
KW - Credit Default Swap Spreads
KW - Risk Premium
KW - Financial Integration
M3 - Working paper
T3 - Discussion Paper Series / Tjalling C. Koopmans Research Institute
BT - Financial Stability in European Banking: The Role of Common Factors
PB - UU USE Tjalling C. Koopmans Research Institute
CY - Utrecht
ER -