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Annals of Finance

, Volume 9, Issue 4, pp 757–786 | Cite as

Measures of systemic risk and financial fragility in Korea

  • Jong Han Lee
  • Jaemin Ryu
  • Dimitrios P. Tsomocos
Research Article

Abstract

This paper provides a quantitative metric for financial stability of Korean commercial banking system based on the Tsomocos (J Math Econ 39(5–6):619–655, 2003) model, for which we use market data as proxies for probabilities of default and equity valuation of the banking sector. We estimate the effect of the probability of default and the equity valuation of the banking sector on real output using a vector error correction model (VECM). In addition, we estimate the contributions of individual banks to systemic risk using CoVaR and MES (Marginal Expected Shortfall). CoVaR is estimated based on the methodology of Adrian and Brunnermeier (2010), and MES is estimated based on Shapley value methodology which has been introduced by Tarashev et al. (2010).

Keywords

Financial stability Systemic risk JPoD CoVaR  MES Shapley value 

JEL Classification

E30 E44 G01 G10 G18 G20 G28 

Notes

Acknowledgments

We are grateful to Gong Pil Choi, Charles Goodhart, Tae Soo Kang, Dae Sik Kim, Hoon Kim, Li Lin, Juan Francisco Martinez, Byung Hee Seong, Jong Suk Won, an anonymous referee and the participants of the “Systemic Risk and Financial Stability” seminar at the Bank of Korea in January 2012 for their helpful comments. We especially thank an anonymous referee, Seung Hwan Lee and Miguel Segoviano for providing us with excellent technical assistance and computer codes. However, all remaining errors are ours. This work is compiled with the financial support of the Bank of Korea. Dimitrios Tsomocos gratefully acknowledges the support and the hospitality of the Bank of Korea.

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Copyright information

© Springer-Verlag Berlin Heidelberg 2012

Authors and Affiliations

  • Jong Han Lee
    • 1
  • Jaemin Ryu
    • 1
  • Dimitrios P. Tsomocos
    • 2
  1. 1.Marcroprudential Analysis DepartmentThe Bank of KoreaJung-Gu, SeoulRepublic of Korea
  2. 2.Saïd Business School and St. Edmund HallUniversity of OxfordOxfordUK

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