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Back to the Future: Backtesting Systemic Risk Measures during Historical Bank Runs and the Great Depression

Author

Listed:
  • Brownlees, Christian
  • Chabot, Ben
  • Ghysels, Eric
  • Kurz, Christopher

Abstract

We evaluate the performance of two popular systemic risk measures, CoVaR and SRISK, during eight financial panics in the era before FDIC insurance. Bank stock price and balance sheet data were not readily available for this time period. We rectify this shortcoming by constructing a novel dataset for the New York banking system before 1933. Our evaluation exercise focuses on assessing whether systemic risk measures were able to detect systemically important financial institutions and to provide early warning signals of aggregate financial sector turbulence. The predictive ability of CoVaR and SRISK is measured controlling for a set of commonly employed market risk measures and bank ratios. We find that CoVaR and SRISK help identifying systemic institutions in periods of distress beyond what is explained by standard risk measures up to six months prior to the panic events. Increases in aggregate CoVaR and SRISK precede worsening conditions in the financial system; however, the evidence of predictability is weaker.

Suggested Citation

  • Brownlees, Christian & Chabot, Ben & Ghysels, Eric & Kurz, Christopher, 2017. "Back to the Future: Backtesting Systemic Risk Measures during Historical Bank Runs and the Great Depression," CEPR Discussion Papers 12178, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:12178
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    References listed on IDEAS

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    1. Davis, Joseph H., 2006. "An Improved Annual Chronology of U.S. Business Cycles since the 1790s," The Journal of Economic History, Cambridge University Press, vol. 66(1), pages 103-121, March.
    2. Jon R. Moen & Ellis W. Tallman, 1990. "Lessons from the panic of 1907," Economic Review, Federal Reserve Bank of Atlanta, issue May, pages 2-13.
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    Cited by:

    1. Sanjiv R. Das & Kris James Mitchener & Angela Vossmeyer, 2018. "Systemic Risk and the Great Depression," NBER Working Papers 25405, National Bureau of Economic Research, Inc.
    2. Sanjiv R. Das & Kris James Mitchener & Angela Vossmeyer, 2018. "Systemic Risk and the Great Depression," CESifo Working Paper Series 7425, CESifo.
    3. Das, Sanjiv & Mitchener, Kris James & Vossmeyer, Angela, 2018. "Systemic Risk and the Great Depression," CEPR Discussion Papers 13416, C.E.P.R. Discussion Papers.
    4. Colletaz, Gilbert & Levieuge, Grégory & Popescu, Alexandra, 2018. "Monetary policy and long-run systemic risk-taking," Journal of Economic Dynamics and Control, Elsevier, vol. 86(C), pages 165-184.
    5. Fina Kamani, Eric, 2019. "The effect of non-traditional banking activities on systemic risk: Does bank size matter?," Finance Research Letters, Elsevier, vol. 30(C), pages 297-305.

    More about this item

    Keywords

    Financial crises; Risk Measures; systemic risk;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • 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
    • N21 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: Pre-1913

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