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Multifactor Risk Attribution Applied to Systemic, Climate and Geopolitical Tail Risks for the Eurozone Banking Sector

Author

Listed:
  • Giulia Bettin

    (Department of Economic and Social Sciences, Università Politecnica delle Marche, 60121 Ancona, Italy)

  • Gian Marco Mensi

    (Department of Economic and Social Sciences, Università Politecnica delle Marche, 60121 Ancona, Italy)

  • Maria Cristina Recchioni

    (Department of Economic and Social Sciences, Università Politecnica delle Marche, 60121 Ancona, Italy)

Abstract

The aim of this work is to introduce an innovative methodology for performing risk attribution within a multifactor risk framework. We applied this analysis to the assessment of systemic, climate, and geopolitical risks relative to a representative sample of Eurozone banks between 2011 and 2022. Comparing the results to the output of a bivariate approach, we found that contemporaneous tail crises generate combined equity losses exceeding partial analysis estimates. We then attributed the combined risk to each factor and to the effect of their interaction by employing our proposed frequency-based approach. For our computations, we used multivariate GARCH, Monte Carlo simulations, and a suite of Eurozone-specific factors. Our results show that total combined risk is on average 18% higher than traditional systemic risk estimates, that climate risk more than doubled in our period of analysis, and that geopolitical risk surged to over 5% of total combined risk. Our climate risk estimate is in line with the results of the 2022 European Central Bank climate stress test, and our geopolitical risk measure shows a positive correlation with the GPRD and Threats index.

Suggested Citation

  • Giulia Bettin & Gian Marco Mensi & Maria Cristina Recchioni, 2023. "Multifactor Risk Attribution Applied to Systemic, Climate and Geopolitical Tail Risks for the Eurozone Banking Sector," Risks, MDPI, vol. 11(10), pages 1-26, September.
    • Handle: RePEc:gam:jrisks:v:11:y:2023:i:10:p:173-:d:1252146
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    References listed on IDEAS

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    1. Richard Berner & Robert Engle & Hyeyoon Jung, 2021. "CRISK: Measuring the Climate Risk Exposure of the Financial System," Staff Reports 977, Federal Reserve Bank of New York.
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