Advertisement

Annals of Operations Research

, Volume 262, Issue 2, pp 579–603 | Cite as

Systemic risk, financial markets, and performance of financial institutions

  • Edward M. H. Lin
  • Edward W. SunEmail author
  • Min-Teh Yu
S.I.: Financial Economics

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.

Keywords

Systemic risk MES SRISK CoVaR Financial crisis 

References

  1. Acharya, V. V. (2009). A theory of systemic risk and design of prudential bank regulation. Journal of Financial Stability, 5(3), 224–255.CrossRefGoogle Scholar
  2. Acharya, V. V., Pedersen, L. H., Philippon, T., & Richardson, M. P. (2010). Measuring systemic risk, SSRN Scholarly Paper ID 1573171. Rochester, NY: Social Science Research Network.Google Scholar
  3. Acharya, V., Engle, R., & Richardson, M. (2012). Capital shortfall: A new approach to ranking and regulating systemic risks. American Economic Review, 102(3), 59–64.CrossRefGoogle Scholar
  4. Adrian, T., & Brunnermeier, M. K. (2011). CoVaR, NBER Working Paper 17454. Cambridge, MA: National Bureau of Economic Research, Inc.Google Scholar
  5. Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies, 58(2), 277–297.CrossRefGoogle Scholar
  6. Banulescu, G.-D., & Dumitrescu, E.-I. (2015). Which are the SIFIs? A component expected shortfall approach to systemic risk. Journal of Banking & Finance, 50, 575–588.CrossRefGoogle Scholar
  7. Bartram, S. M., Brown, G. W., & Hund, J. E. (2007). Estimating systemic risk in the international financial system. Journal of Financial Economics, 86(3), 835–869.CrossRefGoogle Scholar
  8. Basel Committee on Banking Supervision. (2011). Assessment of the macroeconomic impact of higher loss absorbency for global systemically important banks. Technical report, Bank for International Settlements.Google Scholar
  9. Billio, M., Getmansky, M., Lo, A. W., & Pelizzon, L. (2012). Econometric measures of connectedness and systemic risk in the finance and insurance sectors. Journal of Financial Economics, 104(3), 535–559.CrossRefGoogle Scholar
  10. Bisias, D., Flood, M., Lo, A. W., & Valavanis, S. (2012). A survey of systemic risk analytics. Annual Review of Financial Economics, 4(1), 255–296.CrossRefGoogle Scholar
  11. Brownlees, C. T., & Engle, R. F. (2012). Volatility, correlation and tails for systemic risk measurement, SSRN Scholarly Paper ID 1611229. Rochester, NY: Social Science Research Network.Google Scholar
  12. Castro, C., & Ferrari, S. (2014). Measuring and testing for the systemically important financial institutions. Journal of Empirical Finance, 25, 1–14.CrossRefGoogle Scholar
  13. Danielsson, J., James, K. R., Valenzuela, M., & Zer, I. (2015). Model risk of risk models, SSRN Scholarly Paper ID 2425689. Rochester, NY: Social Science Research Network.Google Scholar
  14. de Bandt, O., & Hartmann, P. (2000). Systemic risk: A survey CEPR Discussion Paper 2634, C.E.P.R. Discussion Papers.Google Scholar
  15. Duan, J.-C., & Zhang, C. (2013). Cascading defaults and systemic risk of a banking network, SSRN Scholarly Paper ID 2278168. Rochester, NY: Social Science Research Network.Google Scholar
  16. ECB. (2010). Financial stability review. Technical report, European Central Bank.Google Scholar
  17. Engle, R. (2002). Dynamic conditional correlation. Journal of Business & Economic Statistics, 20(3), 339–350.CrossRefGoogle Scholar
  18. Engle, R. (2009). Anticipating correlations: A new paradigm for risk management. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
  19. Girardi, G., & Tolga Ergn, A. (2013). Systemic risk measurement: Multivariate GARCH estimation of CoVaR. Journal of Banking & Finance, 37(8), 3169–3180.CrossRefGoogle Scholar
  20. Glosten, L. R., Jagannathan, R., & Runkle, D. E. (1993). On the relation between the expected value and the volatility of the nominal excess return on stocks. The Journal of Finance, 48(5), 1779–1801.CrossRefGoogle Scholar
  21. Hausman, J. A. (1978). Specification tests in econometrics. Econometrica, 46(6), 1251–1271.CrossRefGoogle Scholar
  22. Huang, X., Zhou, H., & Zhu, H. (2009). A framework for assessing the systemic risk of major financial institutions. Journal of Banking & Finance, 33(11), 2036–2049.CrossRefGoogle Scholar
  23. Huang, X., Zhou, H., & Zhu, H. (2012). Systemic risk contributions. Journal of Financial Services Research, 42(1–2), 55–83.CrossRefGoogle Scholar
  24. Kaufman, G. G. (1999). Central banks, asset bubbles, and financial stability. In M. I. Blejer & M. Skreb (Eds.), Central banking, monetary policies, and the implications for transition economies. US: Springer.Google Scholar
  25. Kritzman, M., Li, Y., Page, S., & Rigobon, R. (2011). Principal components as a measure of systemic risk. The Journal of Portfolio Management, 37(4), 112–126.CrossRefGoogle Scholar
  26. Nier, E., Yang, J., Yorulmazer, T., & Alentorn, A. (2007). Network models and financial stability. Journal of Economic Dynamics and Control, 31(6), 2033–2060.CrossRefGoogle Scholar
  27. Nucera, F., Schwaab, B., Koopman, S. J., & Lucas, A. (2015). The information in systemic risk rankings. Tinbergen Institute Discussion Paper 15-070/III/DSF94, Tinbergen Institute.Google Scholar
  28. Puzanova, N., & Dllmann, K. (2013). Systemic risk contributions: A credit portfolio approach. Journal of Banking & Finance, 37(4), 1243–1257.CrossRefGoogle Scholar
  29. Schwarcz, S. (2008). Systemic risk. Georgetown Law Journal, 97, 193–249.Google Scholar
  30. Yun, J., & Moon, H. (2014). Measuring systemic risk in the Korean banking sector via dynamic conditional correlation models. Pacific-Basin Finance Journal, 27, 94–114.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  • Edward M. H. Lin
    • 1
  • Edward W. Sun
    • 2
    Email author
  • Min-Teh Yu
    • 1
  1. 1.National Chiao Tung UniversityHsinchuTaiwan
  2. 2.KEDGE Business SchoolBordeauxFrance

Personalised recommendations