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Measuring systemic risk contribution: A higher-order moment augmented approach

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  • Wang, Peiwen
  • Huang, Guanglin

Abstract

Marginal contributions of individual institutions to the systemic risk contain predictive power for potential future exposures and provide early warning signals to regulators and the public. In this paper, the higher-order co-skewness and co-kurtosis are used to construct systemic risk contribution measures, which allow us to identify and characterize the co-movement driving the asymmetry and tail behavior of the joint distribution of asset returns. We illustrate the usefulness of higher-order moment augmented approach by using 4868 stocks living in the Chinese market from June 2002 to March 2022. The empirical results show that these higher-order moment measures convey useful information for systemic risk contribution measurement and portfolio selection, complementary to the information extracted from a standard principal components analysis.

Suggested Citation

  • Wang, Peiwen & Huang, Guanglin, 2024. "Measuring systemic risk contribution: A higher-order moment augmented approach," Finance Research Letters, Elsevier, vol. 59(C).
    • Handle: RePEc:eee:finlet:v:59:y:2024:i:c:s1544612323012059
    DOI: 10.1016/j.frl.2023.104833
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    Keywords

    Co-skewness; Co-kurtosis; Systemic risk contribution; Portfolio selection; Eigenvalue decomposition;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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