Inter-Industry Contagion between UK Life-Insurers and UK Banks: An Event Study

32 Pages Posted: 6 Mar 2005

Date Written: May 2007

Abstract

Understanding interlinkages in a financial system is an integral part of the assessment of its stability. This paper employs an event study technique to assess the significance of interlinkages from the UK life insurance sector to the UK banking system in times of stress. The paper uses a thorough methodology to enhance standard event study techniques by adjusting for autocorrelation and heteroskedasticity when calculating the abnormal returns' forecast errors and for the offsetting effects in cumulative abnormal returns. We take an original approach by introducing the use of trading volumes to detect significant reactions not captured by the use of equity prices. The paper shows evidence of interlinkages from the UK life insurance to the UK banking sector, and concludes that contagion is driven by banks' ownership of life insurance assets and only occurs during events that have hit the life insurance sector as a whole.

Keywords: Event study, contagion, banking sector, life insurance sector, financial stability

JEL Classification: G2, G14, G21, G22

Suggested Citation

Stringa, Marco and Monks, Allan, Inter-Industry Contagion between UK Life-Insurers and UK Banks: An Event Study (May 2007). Bank of England Working Paper No. 325, Available at SSRN: https://ssrn.com/abstract=676721 or http://dx.doi.org/10.2139/ssrn.676721

Marco Stringa (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Allan Monks

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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