Idiosyncratic Risks, Bailout, and Financial Crisis: A Copula Approach
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The evidence on the dependence relationship of idiosyncratic risks among public‐listed banks is unclear in the presence of the bailout event in the recent financial crisis. There is a suspicion about the effects of bailout regimes on the idiosyncratic risk circulated among different size‐paired banks. We shed new light on the issue using a copula approach, an approach that allows for a possible skewed distribution and non‐linear time series. We find that both stock return volatility and idiosyncratic risks increase significantly as stock returns increase after a bailout, especially in the money center group. We also find evidence suggesting that the dependence structure of idiosyncratic risks among size‐paired banks decreases after bailout funding notably in Money Center‐Large and Large‐Small size‐paired banks. The findings suggest that the expectation of using a Capital Purchase Program to reduce the probability of a contagion effect in this recent crisis is feasible and obtainable but with limited effects.
Abstract
The evidence on the dependence relationship of idiosyncratic risks among public‐listed banks is unclear in the presence of the bailout event in the recent financial crisis. There is a suspicion about the effects of bailout regimes on the idiosyncratic risk circulated among different size‐paired banks. We shed new light on the issue using a copula approach, an approach that allows for a possible skewed distribution and non‐linear time series. We find that both stock return volatility and idiosyncratic risks increase significantly as stock returns increase after a bailout, especially in the money center group. We also find evidence suggesting that the dependence structure of idiosyncratic risks among size‐paired banks decreases after bailout funding notably in Money Center‐Large and Large‐Small size‐paired banks. The findings suggest that the expectation of using a Capital Purchase Program to reduce the probability of a contagion effect in this recent crisis is feasible and obtainable but with limited effects.
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