Change in Systemic Risk in Indian Financial Market due to COVID-19 Pandemic

23 Pages Posted: 14 Jul 2021

See all articles by Chandramani Jha

Chandramani Jha

Indian Institute of Information Technology (IIIT), Allahabad, Department of Management Studies

Utkarsh Goel

Indian Institute of Information Technology (IIIT), Allahabad

Date Written: July 10, 2021

Abstract

This paper used an economic model of systemic risk given by Acharya (2016) to measure the state of systemic risk in Indian financial market during COVID-19 Pandemic. It is based on marginal expected shortfall (MES), the likelihoods of a financial firm to be undercapitalized when the financial system as a whole is undercapitalized. The paper empirically measures the MES of financial firms of NIFTY 50 for pre-COVID year 2019-20 and COVID year2020-21 and found that the undercapitalization of Indian financial firm has increased 3 fold during COVID-19 Pandemic ensuing systemic risk has been increased during COVID-19 year to pre-COVID year. The result is also supported by daily stock return correlations of financial firms which is a simple and robust indicator of systemic risk. It has been found that the correlations of financial firm stock returns among themselves and market index as well is increased during COVID-19 pandemic that led to rise in systemic risk. Higher correlations among financial firms are a prerequisite for systemic failure.

Keywords: Systemic risk, Marginal expected shortfall (MES), Correlation, COVID, NIFTY50 Financial Firms.

JEL Classification: G32, G21, G01, E44

Suggested Citation

Jha, Chandramani and Goel, Utkarsh, Change in Systemic Risk in Indian Financial Market due to COVID-19 Pandemic (July 10, 2021). Available at SSRN: https://ssrn.com/abstract=3883949 or http://dx.doi.org/10.2139/ssrn.3883949

Chandramani Jha (Contact Author)

Indian Institute of Information Technology (IIIT), Allahabad, Department of Management Studies ( email )

India
8174086281 (Phone)

Utkarsh Goel

Indian Institute of Information Technology (IIIT), Allahabad ( email )

Deoghat
Jhalwa
Allahabad, Uttar Pradesh 211012
India

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