The Two Faces of Interbank Correlation

K Schaeck, CF Silva Buston, Wolf Wagner

Research output: Contribution to conferencePaperAcademic


Abstract: We decompose the correlation of bank stock returns into a systemic risk component and a component arising from diversi cation activities. Estimation for U.S. Bank Holding Companies (BHCs) shows the diversification component to be large and positively related to BHC performance during the crisis of 2007-2009. This suggests that it is important to distinguish between the two sources of interbank correlations when quantifying systemic risk at banks. Our decomposition also permits us to estimate the marginal gains from diversfication, which turn out to be rapidly declining with bank size. Since large banks are additionally found to display high levels of the systemic risk component, they are hence predominantly exposed to the undesirable source of interbank correlation.
Original languageEnglish
Publication statusPublished - 2013
Externally publishedYes

Bibliographical note

Pagination: 31


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