Tail Risk Transmission: A Study of Iran Food Industry
17 Pages Posted: 1 Jun 2020
Date Written: May 2, 2020
This paper extends the extreme downside correlations and hedge (EDC and EDH) methodology of Harris et al. (2019) to model the tail risk co-movement of financial assets under severe firm-level and market conditions. The model is applied to analyze both systematic and systemic exposures in the Iranian food industry. The empirical application address the following questions: 1) which food company is the safest for investors to diversify their investment, and 2) which companies are the risk "transmitters" and "receivers", especially in turbulent times. To this end, we sampled the time series of 11 manufacturing companies and proxy the market indicator with the food industry index, all of which are publicly listed on the Tehran Stock Exchange (TSE). The data covers daily close prices from October 5, 2015, to January 15, 2020. The systematic analysis reveals a positive and statistically significant relationship between the tail risk of the companies and the market index. The centrality analysis of the systemic exposures reveals Mahram Manufacturing as the safest and Behshahr Industries as the riskiest company. We also find evidence that W.Azar.Pegah is the main "transmitter" of tail risk, while Pegah.Fars.Co is the main "receiver" of risk.
Keywords: Food industry, Extreme downside hedge, Extreme downside correlation, Systematic risk, Systemic risk.
JEL Classification: C31, C58, G01, G12
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