Abstract
Using the panel analysis of non-stationarity in idiosycratic and common component method, we decompose Credit Default Swap (CDS) premium data of 11Korean banks into common factors and idiosyncratic shocks. We find that the CDS premium of all 11 banks is mostly explained by one common factor. We also find that the common factor of the banks’ CDS premium is mainly affected by the level and the volatility of stock market prices in developed markets and oil prices. It suggests that the Korean banking industry is susceptible to foreign shocks due to the heavy dependency of the Korean economy on export. We also find that a structural break in the common part of CDS premium occurred in mid-2007, implying that the exposure of credit risk in Korean banks jumped up after the 2007 financial crisis.
Highlights
The explosion and dramatic reversal of capital flows among international markets since the 1990s have ignited a heated debate
We find that there is only one common factor deriving the Credit Default Swap (CDS) premium of Korean banks
We attempted to find the determinants of the common factor by regressing the common factor on macro-financial economic variables such as the daily stock composite index of foreign and domestic markets, Korean sovereign bond CDS premium, volatilities of each asset markets and the commodity prices
Summary
The explosion and dramatic reversal of capital flows among international markets since the 1990s have ignited a heated debate. Some people argue that globalization has gone too far and that international capital markets have become extremely erratic. Others claim that globalization allows capital to move to where it is mostly needed in promoting economic growth. After the currency crisis in the late 1997, Korea has gradually opened its financial markets to promote foreign investment. A series of institutional changes was implemented to facilitate the direct foreign investment. The changes included (1) opening the corporate bond market (December 1997), (2) allowing the purchase of shortterm financial products (February 1998), (3) abolishing the limit of domestic equity investment (May 1998), (4) allowing hostile M&A activities (April 1998), (5) opening more industries for foreign investment
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callMore From: American Journal of Economics and Business Administration
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
