Systemic Risk in Europe
Robert F. Engle
New York University - Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance
University of Lausanne; Swiss Finance Institute
University of Lausanne - School of Economics and Business Administration (HEC-Lausanne); Centre for Economic Policy Research (CEPR); Swiss Finance Institute
December 1, 2012
Swiss Finance Institute Research Paper No. 12-45
Systemic risk may be defined as the propensity of a financial institution to be undercapitalized when the financial system as a whole is undercapitalized. Systemic risk is related to the market capitalization of the firm, its financial leverage, and the sensitivity of its equity return to market shocks. In this paper, we investigate European financial institutions and describe an econometric approach designed to measure systemic risk for non-U.S. institutions. We expand the approach developed by Brownlees and Engle (2010) to the case with several factors explaining the dynamics of financial firms returns with asynchronicity of time zones. We apply this methodology to the 196 largest European financial firms and estimate their systemic risk over the 2000-2012 period. We find that banks and insurance companies bear approximately 80% and 20% of the systemic risk in Europe, respectively. Over the period of our study, the countries with the highest levels of systemic risk are the U.K. and France, and the firms with the highest levels of systemic risk are Deutsche Bank and Barclays.
Number of Pages in PDF File: 49
Keywords: Systemic Risk, Marginal Expected Shortfall, Multi-factor Model, Volatility, Correlation
JEL Classification: C22, C23, C53working papers series
Date posted: December 22, 2012
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo3 in 6.158 seconds