Journal of Banking & Finance Vol. 77 2017
Financial contagion risk and the stochastic discount factor
Abstract
I provide evidence that financial contagion risk is an important source of the equity risk premium. Banks’ contributions to aggregate financial contagion are estimated in a state space framework and linked to systemic risk. Greater bank connectedness today leads to increased systemic risk 3–12 months later. More contagious banks earn significantly greater risk-adjusted returns than less contagious ones and the tradable high contagion-minus-low contagion bank portfolio is priced in the cross-section of stock returns. Stocks that co-move more strongly with contagious banks have greater expected returns. These results are robust to factor model specification, test assets, and time period considered.
- DOI
- 10.1016/j.jbankfin.2017.01.012
- Volume
- 77
- Pages
- 230-248
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib