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Quantifying endogenous and exogenous shocks to financial sector systemic risk: A comparison of GFC and COVID-19

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  • Usman, Muhammad
  • Umar, Zaghum
  • Choi, Sun-Yong
  • Teplova, Tamara

Abstract

In this study, we use segregated endogenous and exogenous shocks to large banks’ returns to compare the effect of each on financial sector systemic risk. We use the copula-CoVaR methodology and GARCH (1,1) with time-varying moments to model the marginal distribution function and bivariate probability distribution of the tail returns. We find that endogenous risk dominates exogenous risk in the financial system. A comparison of the 2008 global financial crisis and COVID-19 reveals that the crisis aggravates only as exogenous shocks to the system persist. Additionally, we find that large banks reduce the total risk of the system in normal times but increase the risk of the financial system in crisis times. Our findings have important implications for policymakers, investors, and portfolio managers.

Suggested Citation

  • Usman, Muhammad & Umar, Zaghum & Choi, Sun-Yong & Teplova, Tamara, 2024. "Quantifying endogenous and exogenous shocks to financial sector systemic risk: A comparison of GFC and COVID-19," The Quarterly Review of Economics and Finance, Elsevier, vol. 94(C), pages 281-293.
    • Handle: RePEc:eee:quaeco:v:94:y:2024:i:c:p:281-293
    DOI: 10.1016/j.qref.2024.02.004
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    More about this item

    Keywords

    Financial sector systemic risk; Endogenous and Exogenous Shock; Copula-CoVaR; 2008 global financial crisis; COVID-19 pandemic;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G00 - Financial Economics - - General - - - General

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