Systemic Risk and the Inter-Connectedness between Banks and Insurers: An Econometric Analysis
Journal of Risk and Insurance, Forthcoming
46 Pages Posted: 3 Feb 2012 Last revised: 5 Sep 2014
Date Written: June 12, 2012
This paper uses high frequency market value data on credit default swap spreads and intra-day stock prices to measure systemic risk in the insurance sector. Using the systemic risk measure, we examine the inter-connectedness between banks and insurers with Granger causality tests. Based on linear and non-linear causality tests, we find evidence of significant bidirectional causality between insurers and banks. However, after correcting for conditional heteroskedasticity, the impact of banks on insurers is stronger and of longer duration than the impact of insurers on banks. Stress tests confirm that banks create significant systemic risk for insurers but not vice versa.
Keywords: Insurance, banks, systemic risk, probability of default, Granger causality, inter-connectedness
JEL Classification: G01, G21, G22, G28
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