Inter-Industry Contagion between UK Life-Insurers and UK Banks: An Event Study
32 Pages Posted: 6 Mar 2005
Date Written: May 2007
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: Suggested Citation