Measurement of Contagion in Banks' Equity Prices

Posted: 24 Aug 2006

See all articles by Reint Gropp

Reint Gropp

Halle Institute for Economic Research

G. A. Moerman

AEGON Asset Management; Erasmus University Rotterdam (EUR) - Department of Financial Management

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Abstract

This paper uses the co-incidence of extreme shocks to banks' risk to examine within-country and across country contagion among large EU banks. Banks' risk is measured by the first difference of weekly distances to default and abnormal returns. Using Monte Carlo simulations, the paper examines whether the observed frequency of large shocks experienced by two or more banks simultaneously is consistent with the assumption of a multivariate normal or a student t distribution. Further, the paper proposes a simple metric, which is used to identify contagion from one bank to another and identify "systemically important" banks in the EU.

Keywords: Banking, Contagion, Monte Carlo simulations

JEL Classification: G21, F36, G15

Suggested Citation

Gropp, Reint and Moerman, Gerard A., Measurement of Contagion in Banks' Equity Prices. Journal of International Money and Finance, Vol. 23, No. 3, pp. 405-459, April 2004. Available at SSRN: https://ssrn.com/abstract=926280

Reint Gropp (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Gerard A. Moerman

AEGON Asset Management ( email )

P.O. Box 202
2501 CE The Hague
Netherlands
+31 70 344 8318 (Phone)

Erasmus University Rotterdam (EUR) - Department of Financial Management ( email )

P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands
+31 10 408 2790 (Phone)

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