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The role of contagion in the transmission of financial stress

Author

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  • Herculano, Miguel C.
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. JEL Classification: E44, G01, C11, G21

Suggested Citation

  • Herculano, Miguel C., 2018. "The role of contagion in the transmission of financial stress," ESRB Working Paper Series 81, European Systemic Risk Board.
    • Handle: RePEc:srk:srkwps:201881
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    File URL: https://www.esrb.europa.eu//pub/pdf/wp/esrb.wp81.en.pdf
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    Cited by:

    1. Colin Ellis, 2020. "Are Corporate Bond Defaults Contagious across Sectors?," IJFS, MDPI, vol. 8(1), pages 1-17, January.
    2. Anca Ionășcuți & Bogdan Dima, 2022. "Contagion effects on financial markets risk," Journal of Financial Studies, Institute of Financial Studies, vol. 12(7), pages 105-133, May.

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    More about this item

    Keywords

    Bayesian methods; contagion; spatial econometrics; systemic risk;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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