bank equity prices.pdf (1.13 MB)
How the euro-area sovereign-debt crisis led to a collapse in bank equity prices
journal contributionposted on 2015-11-16, 10:49 authored by Stephen Hall, George S. Tavlas, H. Gibson
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.
CitationJournal of Financial Stability, 2016, 26, pp. 266–275
Author affiliation/Organisation/COLLEGE OF SOCIAL SCIENCES, ARTS AND HUMANITIES/Department of Economics
- AM (Accepted Manuscript)