Bank Interventions and Downside Correlation Risk Premium: Evidence from the Global and Euro-Area Crisis
43 Pages Posted: 29 Nov 2014 Last revised: 23 Aug 2015
Date Written: May 8 , 2015
Abstract
Using a novel dataset on government interventions into financial institutions between 2008-2013, we examine the impact of capital injection announcements on the downside correlation risk premium (DCRP), the compensation that investors demand to bear the risk of large correlated drops in banks' stock prices. We find that intervention announcements significantly reduce DCRP in the U.S., while only interventions involving multiple banks reduce DCRP in the euro area. Interventions in the euro area appear to be fragmented, as they are more effective for banks within the country intervening, especially for countries that are less fiscally constrained and have lower CDS spreads.
Keywords: Downside Correlation Risk Premium, Bank Interventions, Variance Risk Premium, European Banking Union
JEL Classification: G15, G21, G28, F36
Suggested Citation: Suggested Citation