The Role of Contagion in the Transmission of Financial Stress

38 Pages Posted: 5 Nov 2020

See all articles by Miguel Herculano

Miguel Herculano

University of Freiburg; University of Glasgow

Date Written: August, 2018

Abstract

I examine the relevance of contagion in explaining financial distress in the US banking system by identifying the component of bank level probabilities that is due to contagion. Identification is achieved after controlling for macrofinancial and bank specific shocks that have similar consequences to contagion. I use a Bayesian spatial autoregressive model that allows for time-dependent network interactions, and find that bank default likelihoods depend, to a large extent, on peer effects that account on average for approximately 35 per cent of total distress. Furthermore, I find evidence of significant heterogeneity amongst banks and some institutions to be systemically more important that others, in terms of peer effects.

Keywords: Bayesian methods, contagion, spatial econometrics, systemic risk

JEL Classification: E44, G01, C11, G21

Suggested Citation

Herculano, Miguel, The Role of Contagion in the Transmission of Financial Stress (August, 2018). ESRB: Working Paper Series No. 2018/81, Available at SSRN: https://ssrn.com/abstract=3723429 or http://dx.doi.org/10.2139/ssrn.3723429

Miguel Herculano (Contact Author)

University of Freiburg ( email )

Fahnenbergplatz
Freiburg, D-79085
Germany

University of Glasgow ( email )

Adam Smith Business School
Glasgow, Scotland G12 8LE
United Kingdom

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