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Stability of the Financial System: Systemic Dependencies between Bank and Insurance Sectors
Thesis title in Czech: Stability of the Financial System: Systemic Dependencies between Bank and Insurance Sectors
Thesis title in English: Stability of the Financial System: Systemic Dependencies between Bank and Insurance Sectors
Key words: finanční stabilita, systemické riziko, závislost v extrémech, Teorie extremálních hodnot
English key words: financial stability, systemic risk, dependence in extremes, Extreme Value Theory
Academic year of topic announcement: 2012/2013
Thesis type: diploma thesis
Thesis language: angličtina
Department: Institute of Economic Studies (23-IES)
Supervisor: PhDr. Boril Šopov, M.Sc., LL.M.
Author: hidden - assigned by the advisor
Date of registration: 20.06.2013
Date of assignment: 21.06.2013
Date and time of defence: 24.09.2014 09:00
Venue of defence: IES
Date of electronic submission:31.07.2014
Date of proceeded defence: 24.09.2014
Opponents: prof. Ing. Karel Janda, Dr., Ph.D., M.A.
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Preliminary scope of work
The events of recent years starting in the U.S. by the Lehman bankruptcy have considerably impaired the stability of financial systems globally. The breakdowns of individual institutions no longer remain an issue of those institutions but they distribute widely across other entities and even the borders. This fact stands behind an extraordinary interest in investigating dependencies among financial entities. Given the very close interaction in the interbank market and similarity of balance sheets, which makes banks extremely vulnerable to systemic risks, most empirical studies have focused their attention on developing methods for measuring dependencies in banking systems. However, to ensure the stability of the entire financial system it is necessary to uncover potential linkages beyond banks. The objective of my thesis will be to examine systemic dependencies between banks and insurance companies in the European Union. Interconnections between these two financial subsystems in such large geographical area are not discussed that much in the literature and they thus might pose a threat to financial stability. The dependencies will be examined in three sample periods (before, during and after the financial crises 2008/2009) with the aim of uncovering a changing pattern in systemic risk over time and under different market conditions. For this purpose I am going to apply financial time series of the EU publicly listed banks and insurance companies.

Systemic dependencies will be investigated using the daily stock market returns of the European banks and insurance companies that are publicly listed. Data will be obtained from a sample of the 15 EU member states and it will cover the period from 2000 up to the present. For each member state the 5 largest banks and insurance companies will be chosen. The selection of financial entities will be made based on the balance sheet criteria meaning that entities with the highest asset value will be included in the model. Such procedure allows creating a unique dataset consisting of 75 banks and insurers. Dependencies will be subsequently modeled within and across both industries. With respect to the method employed, characteristic feature of the stock market time series is that it is distributed in a way which does not correspond to normal distribution and the data thus shows the presence of heavy tails. Consequently, when modeling dependencies it is necessary to make use of techniques that go beyond the simple correlation. Following approach employed by Hartmann et al. (2005) and other related works, I am going to apply the measure which draws on the Extreme Value Theory and examines dependencies in extremes. In addition to bivariate dependence modeling defined as the probability with which an entity goes bankrupt assuming that another entity does so, I would also like to focus on modeling multivariate dependence of stock returns.
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