Modeling Financial Sector Joint Tail Risk in the Euro Area

Tinbergen Institute Discussion Paper 13-063/IV/DSF56

36 Pages Posted: 18 May 2013 Last revised: 13 Oct 2014

See all articles by Andre Lucas

Andre Lucas

Vrije Universiteit Amsterdam - School of Business and Economics; Tinbergen Institute

Bernd Schwaab

European Central Bank (ECB) - Directorate General Research

Xin Zhang

Sveriges Riksbank - Research Division

Multiple version iconThere are 3 versions of this paper

Date Written: April 1, 2013

Abstract

We develop a novel high-dimensional non-Gaussian modeling framework to infer conditional and joint risk measures for many financial sector firms. The model is based on a dynamic Generalized Hyperbolic Skewed-t block-equicorrelation copula with time-varying volatility and dependence parameters that naturally accommodates asymmetries, heavy tails, as well as non-linear and time-varying default dependence. We demonstrate how to apply a conditional law of large numbers in this setting to define risk measures that can be evaluated quickly and reliably. We apply the modeling framework to assess the joint risk from multiple financial firm defaults in the euro area during the 2008-2012 financial and sovereign debt crisis. We document unprecedented tail risks during 2011-12, as well as their steep decline after subsequent policy actions.

Keywords: systemic risk; dynamic equicorrelation; generalized hyperbolic distribution; law of large numbers; large portfolio approximation.

JEL Classification: G21, C32

Suggested Citation

Lucas, Andre and Schwaab, Bernd and Zhang, Xin (Kelvin), Modeling Financial Sector Joint Tail Risk in the Euro Area (April 1, 2013). Tinbergen Institute Discussion Paper 13-063/IV/DSF56. Available at SSRN: https://ssrn.com/abstract=2264249 or http://dx.doi.org/10.2139/ssrn.2264249

Andre Lucas (Contact Author)

Vrije Universiteit Amsterdam - School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31 20 598 6039 (Phone)
+31 20 598 6020 (Fax)

HOME PAGE: http://personal.vu.nl/a.lucas

Tinbergen Institute

Roetersstraat 31
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://www.tinbergen.nl

Bernd Schwaab

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Xin (Kelvin) Zhang

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden

Register to save articles to
your library

Register

Paper statistics

Downloads
309
Abstract Views
1,418
rank
86,399
PlumX Metrics