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Systemic Risk for Financial Institutions of Major Petroleum-Based Economies: The Role of Oil

56 Pages Posted: 14 Jun 2017 Last revised: 10 Nov 2017

Ahmed A.A. Khalifa

King Fahd University of Petroleum & Minerals (KFUPM)

Massimiliano Caporin

University of Padua - Department of Statistical Sciences

Michele Costola

Goethe University Frankfurt - Research Center SAFE

Shawkat M. Hammoudeh

Montpellier Business School; Drexel University - Lebow College of Business

Date Written: November 5, 2017

Abstract

This paper examines the relationship between oil price movements and systemic risk of many financial institutions in major petroleum-based economies. We estimate ΔCoVaR for those institutions and thereby observe the presence of elevated increases in the levels corresponding to the subprime and global financial crises. The results provide evidence in favour of a better risk measurement by accounting for oil returns in the risk functions. The estimated spread between the standard CoVaR and the CoVaR that includes oil is absorbed in a time range that is longer than the duration of the oil shocks. This indicates that the drop in oil prices has a longer effect on risk and requires more time to be discounted by the financial institutions. To support the analysis, we consider other major market-based systemic risk measures.

Keywords: Systemic Risk, Risk Measurement, VaR, ΔCoVaR, Oil, Financial Institutions, Petroleum-based Economies

JEL Classification: C22, C58, G01, G17, G20, G21, G32

Suggested Citation

Khalifa, Ahmed A.A. and Caporin, Massimiliano and Costola, Michele and Hammoudeh, Shawkat M., Systemic Risk for Financial Institutions of Major Petroleum-Based Economies: The Role of Oil (November 5, 2017). SAFE Working Paper No. 172. Available at SSRN: https://ssrn.com/abstract=2985352

Ahmed Khalifa

King Fahd University of Petroleum & Minerals (KFUPM) ( email )

Dhahran, 31261
Saudi Arabia
+96638607082 (Phone)
+96638602585 (Fax)

Massimiliano Caporin

University of Padua - Department of Statistical Sciences ( email )

Via Battisti, 241
Padova, 35121
Italy

Michele Costola (Contact Author)

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Shawkat Hammoudeh

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, 34080
France

Drexel University - Lebow College of Business ( email )

3141 Chestnut Street
Philadelphia, PA 19104
United States
2158956673 (Phone)
2158956975 (Fax)

HOME PAGE: http://faculty.lebow.drexel.edu/HammoudehS/

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