The Equity Risk Posed by the Too-Big-To-Fail Banks: A Foster-Hart Estimation

Annals of Operations Research, 253 (1), 21–41, (2017).

26 Pages Posted: 26 Mar 2016 Last revised: 23 Aug 2023

See all articles by Abhinav Anand

Abhinav Anand

Indian Institute of Management Bangalore

Tiantian Li

State University of New York (SUNY) - Department of Applied Mathematics and Statistics

Tetsuo Kurosaki

Bank of Japan

Young Shin Kim

College of Business, Stony Brook University

Date Written: March 23, 2016

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)

JEL Classification: C13, C22, C58, C65, G32

Suggested Citation

Anand, Abhinav and Li, Tiantian and Kurosaki, Tetsuo and Kim, Young Shin, The Equity Risk Posed by the Too-Big-To-Fail Banks: A Foster-Hart Estimation (March 23, 2016). Annals of Operations Research, 253 (1), 21–41, (2017)., Available at SSRN: https://ssrn.com/abstract=2753627 or http://dx.doi.org/10.2139/ssrn.2753627

Abhinav Anand (Contact Author)

Indian Institute of Management Bangalore ( email )

Bannerghatta Road
Bangalore, 560 076
India

Tiantian Li

State University of New York (SUNY) - Department of Applied Mathematics and Statistics ( email )

Stony Brook University
Stony Brook, NY 11794
United States

Tetsuo Kurosaki

Bank of Japan ( email )

2-1-1 Nihonbashi-Hongokucho,Chuo-ku
Tokyo
Japan

Young Shin Kim

College of Business, Stony Brook University ( email )

312 Harriman Hall
100 John S. Toll Drive
Stony Brook, NY 11794
United States
6316327171 (Phone)

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