Banking Integration in Europe: a cointegration-based network approach



Year of publication 2014
Type Article in Proceedings
Conference Proceedings of the 8th International Conference on Currency, Banking and International Finance, "The Role of Financial Sector in Supporting the Economic Recovery of CEE Countries"
MU Faculty or unit

Faculty of Economics and Administration

Field Management and administrative
Keywords banking integration; cointegration; financial networks
Description Assuming the general efficiency of asset markets and ability of investors to identify banks' business prospectives and risks, banks' stock prices provide useful information on their economic condition. In this paper, we suggest to use the information on European banks' stock prices to identify the state of European banking market integration. We first identify the long-run relationships in the European banking markets (as perceived by investors) by employing Engle-Granger cointegration analysis. We then construct cointegration-based networks through cointegration coefficient matrix to illustrate the whole range of available information. The bi-directed and weighted cointegration-based network is used to find most influential banks in Europe and characterize the state of market integration over several time periods of market enlargement, global financial crisis and European sovereign debt crisis. We furthermore investigate the influence of particular banks and countries by PageRank algorithm. The discovered cointegration-based networks illustrate banks' exposures to common risks in the European banking market, which in times of crises should be also considered the most stable and predominant channels of contagion.
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