16- Extreme Stock Return Co-movements of Financial Institutions: Contagion or Interdependence?
- Wetenschappelijke publicatie
Date 30 November 2003
Abstract: This paper investigates contagion of major financial institutions by focusing on extreme stock return co-movements. Our measure of contagion within banking and insurance sectors is the number of coincidences of daily extreme returns that cannot be explained by a linear propagation model of constant correlation. Using a Monte Carlo simulation experiment, we find evidence of contagion for the US, Germany and the UK. This result is stronger for the insurance sector than for the banking sector. In addition, we investigate extreme co-movements among banking and insurance sectors using a multinomial logistic regression model. We find evidence of contagion, even if we control for a number of macroeconomic fundamentals. This indicates that insurance companies are important for the well-functioning of the financial system. JEL Classification: C15, C35, G12, G21, G22. Keywords : banks, contagion, extreme co-movements, extreme stock returns, financial institutions, insurance companies, systemic risk.