Systemic Risk and Asymmetric Responses in the Financial Industry
IMF Working Papers, June 1, 2012
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Bibliographic details
- Authors: Germán López-Espinosa, Antonio Rubia, Laura Valderrama, Antonio Moreno
- Published: June 1, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475504347.001
Summary and objective
- Proposes an extension of the CoVaR measure that captures the asymmetric response of the banking system to positive and negative shocks to the market-valued balance sheets of individual banks.
- Argues that an operational measure of systemic risk capturing non-linear tail comovement between system-wide and individual bank returns had not yet been developed prior to this work.
- Concludes that the asymmetric model produces much better estimates and fitting, and thus improves the capacity to monitor systemic risk.
Key empirical findings
- For the median of the sample of U.S. banks, the relative impact on the system of a fall in individual market value is sevenfold that of an increase.
- The downward bias in systemic risk from ignoring this asymmetric pattern increases with bank size.
- The conditional tail comovement between the banking system and a top decile bank which is losing market value is 5.4 larger than the unconditional tail comovement.
- The conditional tail comovement for banks in the bottom decile is 2.2 (versus the unconditional tail comovement).
Methodological contribution
- Extends the so-called CoVaR measure to capture asymmetric tail comovement between system-wide returns and individual bank returns.
- Emphasizes modeling non-linear tail interdependence to improve estimation and fit of systemic-risk measures.
Policy implications and recommendations
- Monitoring: Adopt asymmetric CoVaR-style measures to improve the capacity to monitor systemic risk.
- Risk assessment: Incorporate asymmetries in tail interdependence into systemic-risk assessment to avoid severe underestimation of systemic risk in a downward market.
- Size sensitivity: Pay particular attention to larger banks, since the downward bias from ignoring asymmetries increases with bank size.
Metadata and classification (as provided)
- Authors: Germán López-Espinosa, Antonio Rubia, Laura Valderrama, Antonio Moreno
- Date: June 1, 2012
- Series: Working Paper No. 2012/152
- Pages: 38
- DOI: https://doi.org/10.5089/9781475504347.001
- ISBN: 9781475504347
- ISSN: 1018-5941
- Subjects: Banking, Commercial banks, Econometric analysis, Financial institutions, Financial sector policy and analysis, Financial statements, Public financial management (PFM), Systemic risk, Treasury bills and bonds, Vector autoregression
- Keywords: banking system; Commercial banks; CoVaR approach; CoVaR estimate; CoVaR framework; CoVaR function; CoVaR measure; CoVaR model; CoVaR prediction; CoVaR process; default premium; descriptive statistics; downside risk; Financial statements; Global; risk contribution; systemic risk; tail-risk dependence; time series; Treasury bills and bonds; Value at Risk; Vector autoregression; WP
Source: Systemic Risk and Asymmetric Responses in the Financial Industry, IMF Working Papers 2012, 152 (2012).