Systemic Risk and Asymmetric Responses in the Financial Industry

39 Pages Posted: 9 Aug 2012

See all articles by German Lopez-Espinosa

German Lopez-Espinosa

affiliation not provided to SSRN

Antonio Moreno

School of Economics and Business, University of Navarra

Antonio Rubia Serrano

University of Alicante, Department of Financial Economics; University of California, Los Angeles (UCLA) - Finance Area

Laura Valderrama

International Monetary Fund - Monetary and Capital Markets Department

Date Written: June 2012

Abstract

To date, an operational measure of systemic risk capturing non-linear tail comovement between system-wide and individual bank returns has not yet been developed. This paper proposes an extension of the so-called CoVaR measure that captures the asymmetric response of the banking system to positive and negative shocks to the market-valued balance sheets of individual banks. For the median of our sample of U.S. banks, the relative impact on the system of a fall in individual market value is sevenfold that of an increase. Moreover, the downward bias in systemic risk from ignoring this asymmetric pattern increases with bank size. The conditional tail comovement between the banking system and a top decile bank which is losing market value is 5.4 larger than the unconditional tail comovement versus only 2.2 for banks in the bottom decile. The asymmetric model also produces much better estimates and fitting, and thus improves the capacity to monitor systemic risk. Our results suggest that ignoring asymmetries in tail interdependence may lead to a severe underestimation of systemic risk in a downward market.

Keywords: Value At Risk, Systemic Risk, Tail-risk Dependence, Downside Risk, Banking Systems, Commercial Banks, Economic Models, Financial Risk, Risk Management, Econometric Methods: - Multiple/simultaneous Equation Models, General Financial Markets, Financial Institutions And Services

Suggested Citation

Lopez-Espinosa, German and Moreno, Antonio and Serrano, Antonio Rubia and Valderrama, Laura, Systemic Risk and Asymmetric Responses in the Financial Industry (June 2012). IMF Working Paper No. 12/152. Available at SSRN: https://ssrn.com/abstract=2127043

German Lopez-Espinosa (Contact Author)

affiliation not provided to SSRN

No Address Available

Antonio Moreno

School of Economics and Business, University of Navarra ( email )

Ed. Amigos
Pamplona, Navarra 31009
Spain

Antonio Rubia Serrano

University of Alicante, Department of Financial Economics ( email )

Ctra. S. Vicente s/n
03690-S. Vicente del Raspeig
Alicante, San Vicente del Raspeig - Alicante 03690
Spain
(34) 965 903 621 (Phone)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
(310) 825-7246 (Phone)

Laura Valderrama

International Monetary Fund - Monetary and Capital Markets Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
78
Abstract Views
2,656
rank
312,453
PlumX Metrics