Identifying Contagion in a Banking Network

37 Pages Posted: 7 Sep 2017

See all articles by Alan D. Morrison

Alan D. Morrison

University of Oxford - Said Business School; University of Oxford - Merton College

Michalis Vasios

European Securities and Markets Authority

Mungo Ivor Wilson

University of Oxford - Said Business School

Filip Zikes

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: 2017-08-15

Abstract

We present the first micro-level evidence of the transmission of shocks through financial networks. Using the network of credit default swap (CDS) transactions between banks, we identify bank CDS returns attributable to counterparty losses. A bank's own CDS spread increases whenever counterparties from whom it has purchased default protection themselves experience losses. We find no such effect from losses of non-counterparties, nor from counterparties to whom the bank has sold protection. The effect on bank CDS returns through this counterparty loss channel is large relative to the direct effect on a bank's CDS returns from its own trading losses.

Keywords: Contagion, Counterparty risk, Credit default swaps, Networks

JEL Classification: G21, G23, L14

Suggested Citation

Morrison, Alan and Vasios, Michalis and Wilson, Mungo Ivor and Zikes, Filip, Identifying Contagion in a Banking Network (2017-08-15). FEDS Working Paper No. 2017-082, Available at SSRN: https://ssrn.com/abstract=3029732 or http://dx.doi.org/10.17016/FEDS.2017.082

Alan Morrison (Contact Author)

University of Oxford - Said Business School ( email )

Department of Finance
Park End Street
Oxford OX1 1HP
United Kingdom
+44 18 6527 6343 (Phone)
+44 18 6527 6310 (Fax)

University of Oxford - Merton College

Merton Street
Oxford OX1 4JD
United Kingdom
+44 18 6527 6343 (Phone)

Michalis Vasios

European Securities and Markets Authority ( email )

103 Rue de Grenelle
Paris, 75007
France

Mungo Ivor Wilson

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 (0) 1865 288914 (Phone)

Filip Zikes

Board of Governors of the Federal Reserve System ( email )

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

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
122
Abstract Views
681
Rank
179,789
PlumX Metrics