Idiosyncratic Risks, Bailout, and Financial Crisis : A Copula Approach

The evidence on the dependence relationship of idiosyncratic risks among public-listed banks is unclear in the presence of bailout event in recent financial crisis. There is suspicion on the effects of bailout regimes on the idiosyncratic risks distribution among different size-paired banks. We shed new light on the issue using a copula approach, an approach to the economic analysis of possible skewed distribution and non-linear time series. The idiosyncratic risks were extracted by CAPM market model with equally-weighted and value-weighted methods as well as Fama & French 3-factor market model. We find that both stock return volatility and idiosyncratic risks increase significantly as stock returns increase after bailout, especially money centers. We also find evidence suggesting that dependence relationship of idiosyncratic risks among size-paired banks decrease after bailout funding; notably, Money center-Large and Large-Small bank groups. The findings suggest that the expectation of using CPP program to reduce probability of contagion effect in this recent crisis is feasible and obtainable, but with limited effects