Forward Looking Banking Stress in EMU Countries
30 Pages Posted: 25 Sep 2014
Date Written: July 2, 2014
Based on contingent claims analysis (CCA), this paper tries to estimate the systemic risk build-up in the European Economic and Monetary Union (EMU) countries using a market based measure "distance-to-default" (DtD). It analyzes the individual and aggregated series for a comprehensive set of banks in each eurozone country over the period 2004-Q4 to 2013-Q2. Given the structural differences in financial sector and banking regulations at national level, the indices provide a useful indicator for monitoring country specific banking vulnerability and stress. We find that average DtD indicators are intuitive, forward-looking and timely risk indicators. The underlying trend, fluctuations and correlations among indices help us analyze the interdependence while cross-sectional differences in DtD prior to crisis suggest banking sector fragility in peripheral EMU countries.
Keywords: contingent claim analysis, distance-to-default, systemic risk.
JEL Classification: G01, G21, G28.
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