Banking sector contingent liabilities and sovereign risk

Arslanalp, Serkan & Liao, Yin (2014) Banking sector contingent liabilities and sovereign risk. Journal of Empirical Finance, 29, pp. 316-330.

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The global financial crisis has underscored the need to pay attention to contingent government liabilities that could arise from bank failures for sovereign risk management. This paper proposes a simple method to construct a contingent liability index (CLI) for a banking sector that takes into account the size and concentration of the banking system, market expectations of bank defaults, and perceptions of government support to each bank. This method allows us to track potential government liabilities related to bank failures for 32 advanced and emerging economies on a monthly basis from 2006 to 2013. Furthermore, we find that the CLI is a significant determinant of sovereign CDS spreads. Our results suggest that a 1 percentage point increase in the CLI is associated with an increase in sovereign CDS spreads by 24 basis points for advanced economies and 75 basis points for emerging markets on average.

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ID Code: 77849
Item Type: Journal Article
Refereed: Yes
Keywords: Contingent liabilities, Sovereign risk, Banking sector
DOI: 10.1016/j.jempfin.2014.08.007
ISSN: 0927-5398
Subjects: Australian and New Zealand Standard Research Classification > ECONOMICS (140000) > APPLIED ECONOMICS (140200) > Financial Economics (140207)
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Current > Schools > School of Economics & Finance
Copyright Owner: Copyright 2014 Elsevier
Copyright Statement: NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Empirical Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Empirical Finance, Volume 29, (December 2014), DOI: 10.1016/j.jempfin.2014.08.007
Deposited On: 19 Oct 2014 22:50
Last Modified: 04 Feb 2015 06:23

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