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Measuring Systemic Risk in the Korean Banking Sector via Dynamic Conditional Correlation Models

Author

Listed:
  • Jaeho Yun

    (Department of Economics, Ewha Womans University)

  • Hyejung Moon

    (Systemic Risk Analysis Team, Marcroprudential Analysis Department, The Bank of Korea)

Abstract

In this paper we study systemic risks in the Korean banking sector by using two famous systemic risk measures -- the MES (marginal expected shortfall) and CoVaR. To compute both measures we employ Engle's dynamic conditional correlation model. Our empirical analysis shows, first, that although these two systemic risk measures differ in defining the contributions to systemic risk, both are qualitatively very similar in explaining the cross-sectional differences in systemic risk contributions across banks. Second, we find that systemic risk contributions are closely related to certain bank characteristic variables (e.g., VaR (value at risk), size and leverage ratio). However, there are differences between the cross-sectional and the time series dimensions in the effects of these variables. Last, using a threshold VAR model, we suggest an overall systemic risk measure -- the aggregate MES -- and its associated threshold value for use as an early warning indicator.

Suggested Citation

  • Jaeho Yun & Hyejung Moon, 2013. "Measuring Systemic Risk in the Korean Banking Sector via Dynamic Conditional Correlation Models," Working Papers 2013-27, Economic Research Institute, Bank of Korea.
    • Handle: RePEc:bok:wpaper:1327
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    References listed on IDEAS

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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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