Tail Risks and Systemic Risks for U.S. and Eurozone Financial Institutions in the Wake of the Global Financial Crisis

56 Pages Posted: 28 Aug 2012

See all articles by Stefan Straetmans

Stefan Straetmans

Maastricht University ; University of Antwerp - Faculty of Applied Economics

Sajid M. Chaudhry

Aston University - Aston Business School

Date Written: August 24, 2012

Abstract

This paper proposes and evaluates several market-based measures for US and eurozone individual bank tail risk and banking system risk. We apply statistical extreme value analysis to the tails of bank equity prices to estimate the likelihood of individual institutions’… financial distress as well as individual banks’ exposure to each other (“contagion risk”) and to global shocks (“extreme systematic ”risk). Moreover, the estimators presuppose that bank equity prices are “heavy tailed” and “asymptotically dependent” as identifying assumption. We also assess to what extent measures of tail risk and systemic risk have been altered by the global fi…nancial crisis that erupted since 2007. Using both U.S. and euro area equity prices allows one to make a cross Atlantic comparison of the fi…nancial systems' ’riskiness and …financial stability. For Europe we assess the relative importance of cross-border bank spillovers as compared to domestic bank spillovers. The results suggest, inter alia, that both tail risk and systemic risk in the US are higher than in the euro area. One possible explanation of the latter outcome is that cross-border risks are still relatively mild in Europe. On both sides of the Atlantic tail risk and systemic risk have increased in the crisis period as compared to pre-crisis times.

Keywords: Banking, Systemic Risk, Asymptotic Dependence, Multivariate Extreme Value Theory

JEL Classification: G21, G28, G29, G12, C49

Suggested Citation

Straetmans, Stefan and Chaudhry, Sajid M., Tail Risks and Systemic Risks for U.S. and Eurozone Financial Institutions in the Wake of the Global Financial Crisis (August 24, 2012). 25th Australasian Finance and Banking Conference 2012, Available at SSRN: https://ssrn.com/abstract=2135575 or http://dx.doi.org/10.2139/ssrn.2135575

Stefan Straetmans

Maastricht University ( email )

Tongersestraat 53
Maastricht, 6200 MD
Netherlands

HOME PAGE: http://www.stefanstraetmans.com

University of Antwerp - Faculty of Applied Economics ( email )

Prinsstraat 13
Antwerp, B-2000
Belgium

Sajid M. Chaudhry (Contact Author)

Aston University - Aston Business School ( email )

Aston Triangle
Birmingham, B47ET
United Kingdom

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