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Tail dependence and indicators of systemic risk for large US depositories

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  • Balla, Eliana
  • Ergen, Ibrahim
  • Migueis, Marco

Abstract

In this study, we investigate the extreme loss tail dependence between stock returns of large US depository institutions. We find that stock returns exhibit strong loss dependence even in their limiting joint extremes. Motivated by this result, we derive extremal dependence-based systemic risk indicators. The proposed systemic risk indicators reflect downturns in the US financial industry very well. We also develop a set of firm-level average extremal dependence measures. We show that these firm-level measures could have been used to identify the firms that were more vulnerable to the 2007–2008 financial crisis. Additionally, we explore the performance of selected systemic risk indicators in predicting the crisis performance of large US depository institutions and find that the average stock return correlations are also good predictors of crisis period returns. Finally, we identify factors predictive of extremal dependence for the US depository institutions in a panel regression setting. Strength of extremal dependence increases with asset size and similarity of financial fundamentals. On the other hand, strength of extremal dependence decreases with capitalization, liquidity, funding stability and asset quality. We believe the proposed indicators have the potential to inform the prudential supervision of systemic risk.

Suggested Citation

  • Balla, Eliana & Ergen, Ibrahim & Migueis, Marco, 2014. "Tail dependence and indicators of systemic risk for large US depositories," Journal of Financial Stability, Elsevier, vol. 15(C), pages 195-209.
  • Handle: RePEc:eee:finsta:v:15:y:2014:i:c:p:195-209
    DOI: 10.1016/j.jfs.2014.10.002
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    References listed on IDEAS

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    1. repec:bla:irvfin:v:17:y:2017:i:2:p:177-204 is not listed on IDEAS
    2. repec:eee:finsta:v:33:y:2017:i:c:p:285-296 is not listed on IDEAS
    3. Pankoke, David, 2014. "Sophisticated vs. Simple Systemic Risk Measures," Working Papers on Finance 1422, University of St. Gallen, School of Finance.
    4. Félix, Luiz & Kräussl, Roman & Stork, Philip, 2016. "The 2011 European short sale ban: A cure or a curse?," Journal of Financial Stability, Elsevier, vol. 25(C), pages 115-131.
    5. repec:eee:phsmap:v:499:y:2018:i:c:p:376-394 is not listed on IDEAS
    6. Marco Valerio Geraci & Jean-Yves Gnabo, 2015. "Measuring interconnectedness between financial institutions with Bayesian time-varying vector autoregressions," Working Papers ECARES 2015-51, ULB -- Universite Libre de Bruxelles.
    7. Marco Valerio Geraci & Jean-Yves Gnabo, 2015. "Measuring Interconnectedness between Financial Institutions with Bayesian Time-Varying VARS," Working Papers ECARES ECARES 2015-51, ULB -- Universite Libre de Bruxelles.
    8. Martin Eling & David Antonius Pankoke, 2016. "Systemic Risk in the Insurance Sector: A Review and Directions for Future Research," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 19(2), pages 249-284, September.

    More about this item

    Keywords

    Extreme value dependence; Systemic risk; Systemically important financial institutions;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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