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

See all articles by Juan M. Londono

Juan M. Londono

Board of Governors of the Federal Reserve System

Mary H. Tian

Board of Governors of the Federal Reserve System

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

Londono-Yarce, Juan-Miguel and Tian, Mary H., Bank Interventions and Downside Correlation Risk Premium: Evidence from the Global and Euro-Area Crisis (May 8 , 2015). FRB International Finance Discussion Paper No. 1117, Available at SSRN: https://ssrn.com/abstract=2531686 or http://dx.doi.org/10.2139/ssrn.2531686

Juan-Miguel Londono-Yarce (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Mary H. Tian

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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