How much does book value data tell us about systemic risk and its interactions with the macroeconomy? A Luxembourg empirical evaluation

In order to effciently capture the contribution to the aggregated systemic risk of each financial institution arising from various important balance-sheet items, this study proposes a comprehensive approach of “Mark-to-Systemic-Risk" to integrate book value data of Luxembourg financial institutions into systemic risk measures. It first characterizes systemic risks and risk spillovers in equity returns for 33 Luxembourg banks, 30 European banking groups, and 232 investment funds.1 The forward-looking systemic risk measures delta CoES, Shapley – delta CoES, SRISK and conditional concentration risk are estimated by using a large-scale dynamic grouped t-copula, and their common components are determined by the generalized dynamic factor model. Several important facts are documented during 2009-2016: (1) Measured by delta CoES of equity returns, Luxembourg banks were more sensitive to the adverse events from investment funds compared to European banking groups, and investment funds were more sensitive to the adverse events from banking groups than from Luxembourg banks. (2) Ranked by Shapley - delta CoES values, money market funds had the highest marginal contribution to the total risk of Luxembourg banks while equity funds exhibited the least share of the risk, and the systemic risk contribution of bond funds, mixed funds and hedge funds became more important toward the end of 2016. (3) The macroeconomic determinants of the aggregate systemic risk of banking groups, Luxembourg banks and investment funds, and the marginal contributions from 15 countries to the aggregate systemic risk of Luxemburg banks and their parent banking groups are all different.