Return Dependence and the Limits of Product Diversification in Financial Firms

Copula-GRAPH models indicate dependence between bank returns and those to insurance underwriting, securities brokerage, and mortgage finance increased during the recent crisis. In contrast, dependence between banks and the broader market was little changed. The crisis-related jump in return dependen...

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Bibliographic Details
Published in:Journal of money, credit and banking credit and banking, 2012-09, Vol.44 (6), p.1151-1183
Main Authors: FOMBY, THOMAS B., GUNTHER, JEFFERY W., HU, JIAN
Format: Article
Language:English
Subjects:
Bank assets
Bank credit
Bank markets
Banking
Banking crises
Banks
Conglomerates
copula
Credit insurance
Dependence
Economic crisis
financial crises
Financial institutions
Financial securities
Financial services
G01
G21
G28
GARCH models
Investment returns
Mortgage insurance
Mortgage loans
Mortgages
Portfolio diversification
Rates of return
return dependence
Stochastic models
Studies
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Summary:Copula-GRAPH models indicate dependence between bank returns and those to insurance underwriting, securities brokerage, and mortgage finance increased during the recent crisis. In contrast, dependence between banks and the broader market was little changed. The crisis-related jump in return dependence within the financial services sector was greatest for banks that had previously appeared the most independent. Larger banks were also especially prone to increased dependence. These findings raise doubts about the ability of financial conglomerates to diversify effectively and highlight the need for policy progress in methods for resolving such institutions should they become illiquid or insolvent.
ISSN:0022-2879
1538-4616
DOI:10.1111/j.1538-4616.2012.00526.x