Back to the Future: Backtesting Systemic Risk Measures During Historical Bank Runs and the Great Depression

65 Pages Posted: 4 Aug 2017

See all articles by Christian T. Brownlees

Christian T. Brownlees

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Benjamin Remy Chabot

Federal Reserve Bank of Chicago

Eric Ghysels

University of North Carolina Kenan-Flagler Business School; University of North Carolina (UNC) at Chapel Hill - Department of Economics

Christopher Johann Kurz

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: July 2017

Abstract

We evaluate the performance of two popular systemic risk measures, CoVaR and SRISK, during eight financial panics in the era before FDIC insurance. Bank stock price and balance sheet data were not readily available for this time period. We rectify this shortcoming by constructing a novel dataset for the New York banking system before 1933. Our evaluation exercise focuses on assessing whether systemic risk measures were able to detect systemically important financial institutions and to provide early warning signals of aggregate financial sector turbulence. The predictive ability of CoVaR and SRISK is measured controlling for a set of commonly employed market risk measures and bank ratios. We find that CoVaR and SRISK help identifying systemic institutions in periods of distress beyond what is explained by standard risk measures up to six months prior to the panic events. Increases in aggregate CoVaR and SRISK precede worsening conditions in the financial system; however, the evidence of predictability is weaker.

Keywords: Financial crises, Risk Measures, systemic risk

JEL Classification: G01, G21, G28, N21

Suggested Citation

Brownlees, Christian T. and Chabot, Benjamin Remy and Ghysels, Eric and Kurz, Christopher Johann, Back to the Future: Backtesting Systemic Risk Measures During Historical Bank Runs and the Great Depression (July 2017). CEPR Discussion Paper No. DP12178, Available at SSRN: https://ssrn.com/abstract=3011416

Christian T. Brownlees (Contact Author)

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain

HOME PAGE: http://econ.upf.edu/~cbrownlees/

Benjamin Remy Chabot

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Eric Ghysels

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Gardner Hall, CB 3305
Chapel Hill, NC 27599
United States
919-966-5325 (Phone)
919-966-4986 (Fax)

HOME PAGE: http://https://eghysels.web.unc.edu/

Christopher Johann Kurz

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551

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