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Systemic risk, financial markets, and performance of financial institutions

  • S.I.: Financial Economics
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Abstract

This paper studies the exposure and contribution of financial institutions to systemic risks in financial markets. We employ three popular indicators of a financial institution’s exposure to systemic risks: the systemic risk index (SRISK) and marginal expected shortfall (MES) of Brownlees and Engle (Volatility, correlation and tails for systemic risk measurement, Social Science Research Network, Rochester, NY, 2012) and the conditional Value-at-Risk (CoVaR) of Adrian and Brunnermeier (2011). We use a primary database of Taiwan financial institutions for our empirical study. A panel contains data of stock market returns and balance sheets of 31 Taiwan financial institutions for 2005–2014. We focus on systemic risk analysis so as to understand the dynamics of volatility, interdependency, and risk during the recent financial crisis. We then report the time series dynamics and cross sectional rankings of these systemic risk measures. The main results indicate that although these three measures differ in their definition of the contributions to systemic risk, all are quite similar in identifying systemically important financial institutions (SIFIs). Moreover, we find empirical evidence that systemic risk contributions are closely related to certain institution characteristic factors. The results of the Granger causality tests prove that a systemic risk measure is a great alternative tool for monitoring early warning signals of distress in the real economy.

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Notes

  1. Bisias et al. (2012) report a survey of systemic risk analytics and also provide taxonomies of systemic risk measures based on different perspectives such as supervisory scope, research directions, and data requirements.

  2. In practice, the report from the Bank for International Settlements [Basel Committee on Banking Supervision (2011)] used one of these systemic risk measures (CoVaR) to identify global systemically important banks. However, these systemic risk measures as supervisory tools are constructed by some research institutions, such as NYU Sterns Volatility Institute (which provides the measures for global financial institutions), the Center for Risk Management at HEC Lausanne (which provides the measures for European financial institutions) etc.

  3. Although the Volatility Laboratory (V-Lab) of the NYU Stern School website provides Taiwan’s SRISK index, it only considers several Taiwan financial institutions. V-Lab is a systemic risk measurement provider for US and global financial firms. It is based at New York University Stern School of Business under the direction of NYU Stern Professor Robert Engle (see http://vlab.stern.nyu.edu/).

  4. Although Taiwan is small measured by its territory and economic scale, based on the 2015 Open Markets Index (OMI) provided by the International Chamber of Commerce (ICC), Taiwan (Chinese Taipei) is ranked with above average openness (28, with a score of 4.1) among 75 countries investigated. In the 2015 Doing Business report, the World Bank ranked Taiwan 19 out of 189 economies for Ease of Doing Business. The 2015 Investment Climate Statement from the U.S. State Department says that “Taiwan ranks in the upper tenth percentile of major global indices measuring ease of doing business, economic freedom, and competitiveness”.

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Authors and Affiliations

  1. National Chiao Tung University, Hsinchu, Taiwan

    Edward M. H. Lin & Min-Teh Yu

  2. KEDGE Business School, Bordeaux, France

    Edward W. Sun

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  1. Edward M. H. Lin
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  2. Edward W. Sun
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Correspondence to Edward W. Sun.

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Lin, E.M.H., Sun, E.W. & Yu, MT. Systemic risk, financial markets, and performance of financial institutions. Ann Oper Res 262, 579–603 (2018). https://doi.org/10.1007/s10479-016-2113-8

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