The impact of the European sovereign debt crisis on banks stocks. Some evidence of shift contagion in Europe |
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| Affiliation: | 1. Department of Economics and Quantitative Methods, Westminster Business School, University of Westminster, London, UK;2. Bank of Spain, Madrid, Spain;3. Department of Economics and IME, University of Salamanca, Salamanca, Spain;1. Freie Universität Berlin, Department of Economics, D-14195 Berlin, Germany;2. University of Regensburg, Department of Economics and Econometrics, D-93040 Regensburg, Germany;3. Institute for Employment Research (IAB), Germany;4. IOS Regensburg, Germany;1. Bank of Greece, Greece;2. University of Leicester, United Kingdom; Bank of Greece, Greece;3. Bank of Greece, 21 E Venizelos Ave, Athens 10250, Greece; University of Leicester, United Kingdom;1. CentER, Finance Department, Tilburg University, Netherlands;2. European Banking Center, Tilburg University, Netherlands;3. European Banking Authority (EBA), London, United Kingdom;4. Department of Financial Economics, Ghent University, Belgium;1. Finance and Accounting Group, WHU – Otto Beisheim School of Management, Burgplatz 2, 56179 Vallendar, Germany;2. Institute for Banking and Finance, University of Zurich and SFI, Bangor University and CEPR, Plattenstrasse 14, 8032 Zürich, Switzerland |
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| Abstract: | This paper analyzes the influence of the recent European sovereign debt crisis on banks’ equity returns for 15 countries. Our data span the period December 14th 2007 - March 8th 2013 that encompasses several episodes of economic and financial turmoil since the collapse of the subprime credit market. Our contribution to the literature is twofold. First, we use an explicit multifactor model of equity returns extended with a sovereign risk factor. Second, we adopt a Smooth Transition Regression (STR) framework that allows for an endogenous definition of crisis periods and captures the changes in parameters associated with shift contagion. We find that the negative impact of the European sovereign debt crisis on banks’ equity returns has been mostly confined to European banks, whereas U.S. banks appear to be unharmed by its direct impact and may even have benefited from it. Besides, we find some evidence of shift contagion across Europe. |
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