Bank credit risk networks: Evidence from the Eurozone

Credit Risk Interconnectedness: What Does the Market Really Know?

“…This assigns a stabilizing role of common exposures to non-troubled securities: two banks which have safer security portfolios individually are also perceived as less interconnected in terms of credit risk. This is in line with the results of Brownlees et al (2015) who find that perceived interconnectedness increases with the extent of "troubledness" of individual banks, and is thus lower for safer individuals.…”

“…The contribution of this paper is to study the relationship between market information-based credit risk interconnectedness and actual common exposures of banks through their actual funding and securities holding (liability-asset structure). We measure empirical bank interconnectedness of a partial correlation measure that relies solely on market-based information proposed in Brownlees et al (2015).…”

“…While simple correlation between two banks might be spurious and could be driven by common dependence with a third party, partial correlation does not su↵er from this drawback as it nets out the influence of all remaining entities. In order to focus on credit risk dependence, we construct our partial correlation index based on banks' idiosyncratic default intensities implied by CDS prices, building upon Ang and Longsta↵ (2013) and Brownlees et al (2015). For simplicity, we call our market-based measure of bank interconnectedness based on idiosyncratic partial correlations simply as realized interconnectedness.…”

“…Secondly, it is related to empirical papers estimating bank interconnectedness from market data. Contributions in this area include the work of Diebold and Yilmaz (2015), Billio et al (2015), Zhang et al (2012), Betz et al (2014) and Brownlees et al (2015).…”

“…Contributions in this area include the work ofDiebold and Yilmaz (2015),Billio, Gray, Lo, Merton, and Pelizzon (2015),Zhang, Schwaab, and Lucas (2012),Betz, Hautsch, Peltonen, and Schienle (2014) andBrownlees, Hans, and Nualart (2015).…”