Network-Based Measures of Systemic Risk in Korea

48 Pages Posted: 30 Mar 2020

See all articles by Jaewon Choi

Jaewon Choi

University of Illinois at Urbana-Champaign - Department of Finance

Jieun Lee

The Bank of Korea; Bank of Korea - Economic Research Institute

Date Written: March 26, 2020

Abstract

English Abstract: We estimate systemic risk in the Korean economy using the econometric measures of commonality and connectedness applied to stock returns. To assess potential systemic risk concerns arising from the high concentration of the economy in large business groups and a few export-oriented sectors, we perform three levels of estimation using individual stocks, business groups, and industry returns. Our results show that the measures perform well over our sample period by indicating heightened levels of commonality and interconnectedness during crisis periods. In out-of-sample tests, we show that the measures can predict future losses in the stock market during the crises. We also provide the recent readings of our measures, both at the market, chaebol, and industry levels. The measures indicate systemic risk is currently not a major concern in Korea, as they tend to be at the lowest level since 1998. Systemic risk within-chaebols or within-industries overall has not significantly increased in the recent sub-period. In contrast, commonality within the finance industry has not subsided, which we interpret as capturing the interconnectedness endemic to the finance industry, rather than indicating a heightened systemic risk within the banking sector.

Keywords: Systemic Risk, Network Analysis, Korean Economy

JEL Classification: G11, G14, G23

Suggested Citation

Choi, Jaewon and Lee, Jieun, Network-Based Measures of Systemic Risk in Korea (March 26, 2020). Bank of Korea WP 2020-8, Available at SSRN: https://ssrn.com/abstract=3561359 or http://dx.doi.org/10.2139/ssrn.3561359

Jaewon Choi (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Jieun Lee

The Bank of Korea ( email )

110 3-Ga Namdaemunno Jung-Gu
Seoul 100-794, 100-794
Korea Republic of (South Korea)
82-2-759-5470 (Phone)

Bank of Korea - Economic Research Institute ( email )

110 3-Ga Namdaemunno Jung-Gu
Seoul 100-794
Korea Republic of (South Korea)

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