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Systemic risk measurement: Multivariate GARCH estimation of CoVaR

Author

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  • Girardi, Giulio
  • Tolga Ergün, A.

Abstract

We modify Adrian and Brunnermeier’s (2011) CoVaR, the VaR of the financial system conditional on an institution being in financial distress. We change the definition of financial distress from an institution being exactly at its VaR to being at most at its VaR. This change allows us to consider more severe distress events, to backtest CoVaR, and to improve its consistency (monotonicity) with respect to the dependence parameter. We define the systemic risk contribution of an institution as the change from its CoVaR in its benchmark state (defined as a one-standard deviation event) to its CoVaR under financial distress. We estimate the systemic risk contributions of four financial industry groups consisting of a large number of institutions for the sample period June 2000 to February 2008 and the 12months prior to the beginning of the crisis. We also investigate the link between institutions’ contributions to systemic risk and their characteristics.

Suggested Citation

  • Girardi, Giulio & Tolga Ergün, A., 2013. "Systemic risk measurement: Multivariate GARCH estimation of CoVaR," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3169-3180.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:8:p:3169-3180
    DOI: 10.1016/j.jbankfin.2013.02.027
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    References listed on IDEAS

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    More about this item

    Keywords

    Value-at-Risk; Conditional Value-at-Risk; Systemic Risk; DCC model;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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