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Testing for Systemic Risk Using Stock Returns

Author

Listed:
  • Paul Kupiec

    () (American Enterprise Institute
    MEF University)

  • Levent Güntay

    (American Enterprise Institute
    MEF University)

Abstract

Abstract The literature proposes several stock return-based measures of systemic risk but does not include a classical hypothesis tests for detecting systemic risk. Using a joint null hypothesis of Gaussian returns and the absence of systemic risk, we develop a hypothesis test statistic to detect systemic risk in stock returns data. We apply our tests on conditional value-at-risk (CoVaR) and marginal expected shortfall (MES) estimates of the 50 largest US financial institutions using daily stock return data between 2006 and 2007. The CoVaR test identifies only one institution as systemically important while the MES test identifies 27 firms including some of the financial institutions that experienced distress in the past financial crisis. We perform a simulation analysis to assess the reliability of our proposed test statistics and find that our hypothesis tests have weak power, especially tests using CoVaR. We trace the power issue to the inherent variability of the nonparametric CoVaR and MES estimators that have been proposed in the literature. These estimators have large standard errors that increase as the tail dependence in stock returns strengthens.

Suggested Citation

  • Paul Kupiec & Levent Güntay, 2016. "Testing for Systemic Risk Using Stock Returns," Journal of Financial Services Research, Springer;Western Finance Association, vol. 49(2), pages 203-227, June.
  • Handle: RePEc:kap:jfsres:v:49:y:2016:i:2:d:10.1007_s10693-016-0254-1
    DOI: 10.1007/s10693-016-0254-1
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:finsta:v:39:y:2018:i:c:p:221-236 is not listed on IDEAS
    2. Chiara Pederzoli & Costanza Torricelli, 2017. "Systemic risk measures and macroprudential stress tests: an assessment over the 2014 EBA exercise," Annals of Finance, Springer, vol. 13(3), pages 237-251, August.
    3. Franklin Allen & Itay Goldstein & Julapa Jagtiani & William W. Lang, 2016. "Enhancing Prudential Standards in Financial Regulations," Journal of Financial Services Research, Springer;Western Finance Association, vol. 49(2), pages 133-149, June.
    4. repec:kap:annfin:v:14:y:2018:i:1:d:10.1007_s10436-017-0310-3 is not listed on IDEAS
    5. Silva, Walmir & Kimura, Herbert & Sobreiro, Vinicius Amorim, 2017. "An analysis of the literature on systemic financial risk: A survey," Journal of Financial Stability, Elsevier, vol. 28(C), pages 91-114.

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