Article ID Journal Published Year Pages File Type
7409424 Journal of Financial Stability 2016 31 Pages PDF
Abstract
We quantify the linkages among banks' equity performance and indicators of sovereign stress by using panel GMM to estimate a three-equation system that examines the impact of sovereign stress, as reflected in both sovereign spreads and sovereign ratings, on bank share prices. We use data for a panel of five euro-area stressed countries. Our findings indicate that a recursive relationship between sovereigns and banks operated during the euro-area crisis. Specifically, for the five crisis countries considered shocks to sovereign spreads fed-through to sovereign ratings, which affected commercial banks' equity-prices. Our results also point to the importance of using levels of equity prices - rather than rates of return - in measuring banks' performance. The use of levels allows us to derive the determinants of long-run equity prices.
Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics, Econometrics and Finance (General)
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