The equity risk posed by the too-big-to-fail banks: a Foster–Hart estimation

  • Abhinav Anand
  • Tiantian Li
  • Tetsuo Kurosaki
  • Young Shin Kim
Original Paper

DOI: 10.1007/s10479-016-2309-y

Cite this article as:
Anand, A., Li, T., Kurosaki, T. et al. Ann Oper Res (2016). doi:10.1007/s10479-016-2309-y
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Abstract

The measurement of financial risk relies on two factors: determination of riskiness by use of an appropriate risk measure; and the distribution according to which returns are governed. Wrong estimates of either, severely compromise the accuracy of computed risk. We identify the too-big-to-fail banks with the set of “Global Systemically Important Banks” (G-SIBs) and analyze the equity risk of its equally weighted portfolio by means of the “Foster–Hart risk measure”—a bankruptcy-proof, reserve based measure of risk, extremely sensitive to tail events. We model banks’ stock returns as an ARMA–GARCH process with multivariate “Normal Tempered Stable” innovations, to capture the skewed and leptokurtotic nature of stock returns. Our union of the Foster–Hart risk modeling with fat-tailed statistical modeling bears fruit, as we are able to measure the equity risk posed by the G-SIBs more accurately than is possible with current techniques.

Keywords

Financial risk Normal Tempered Stable distribution Foster–Hart risk Value-at-Risk (VaR) Average Value-at-Risk (AVaR) 

Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  • Abhinav Anand
    • 1
  • Tiantian Li
    • 2
  • Tetsuo Kurosaki
    • 3
  • Young Shin Kim
    • 4
  1. 1.Financial Mathematics and Computation Cluster, Michael Smurfit Graduate Business SchoolUniversity College DublinDublinIreland
  2. 2.Department of Applied Mathematics and StatisticsSUNY Stony BrookStony BrookUSA
  3. 3.Bank of JapanTokyoJapan
  4. 4.College of BusinessSUNY Stony BrookStony BrookUSA