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Financial Risk Meter for emerging markets

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  • Ben Amor, Souhir
  • Althof, Michael
  • Härdle, Wolfgang Karl

Abstract

In this paper, the daily systemic risk measure FRM (Financial Risk Meter) is proposed for emerging markets (FRM@EM). The FRM@EM is applied to capture systemic risk behavior embedded in the returns of the 25 largest EMs’ Financial Institutions (FIs), covering the BRIMST (Brazil, Russia, India, Mexico, South Africa, and Turkey), and thereby reflects the financial linkages between these economies. The results indicate that the FRM of EMs’ FIs reached its maximum during the US financial crisis following the COVID-19 crisis. In addition, we find that the Macro factors explain the BRIMST's FIs with various degrees of sensibility. Moreover, we propose a robust and well-diversified tail-event and cluster risk-sensitive portfolio allocation model named uplifted hierarchical risk parity (upHRP) and compare it to more classical approaches. Results indicate that the upHRP approach provides better diversification. Moreover, the upHRP portfolio overweights low-central FIs and underweights high-central ones.

Suggested Citation

  • Ben Amor, Souhir & Althof, Michael & Härdle, Wolfgang Karl, 2022. "Financial Risk Meter for emerging markets," Research in International Business and Finance, Elsevier, vol. 60(C).
    • Handle: RePEc:eee:riibaf:v:60:y:2022:i:c:s0275531921002154
    DOI: 10.1016/j.ribaf.2021.101594
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    5. Liao, Yin & Pan, Zheyao, 2022. "Extreme risk connectedness among global major financial institutions: Links to globalization and emerging market fear," Pacific-Basin Finance Journal, Elsevier, vol. 76(C).

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    More about this item

    Keywords

    FRM (Financial Risk Meter); Lasso quantile regression; Financial network; Emerging markets; Hierarchical risk parity;
    All these keywords.

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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