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Conditional Systemic Risk with Penalized Copula


  • Ostap Okhrin
  • Alexander Ristig
  • Jeffrey Sheen
  • Stefan Trück


Financial contagion and systemic risk measures are commonly derived from conditional quantiles by using imposed model assumptions such as a linear parametrization. In this paper, we provide model free measures for contagion and systemic risk which are independent of the speci - cation of conditional quantiles and simple to interpret. The proposed systemic risk measure relies on the contagion measure, whose tail behavior is theoretically studied. To emphasize contagion from extreme events, conditional quantiles are speci ed via hierarchical Archimedean copula. The parameters and structure of this copula are simultaneously estimated by imposing a non-concave penalty on the structure. Asymptotic properties of this sparse estimator are derived and small sample properties illustrated using simulations. We apply the proposed framework to investigate the interconnectedness between American, European and Australasian stock market indices, providing new and interesting insights into the relationship between systemic risk and contagion. In particular, our ndings suggest that the systemic risk contribution from contagion in tail areas is typically lower during times of nancial turmoil, while it can be signi cantly higher during periods of low volatility.

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  • Ostap Okhrin & Alexander Ristig & Jeffrey Sheen & Stefan Trück, 2015. "Conditional Systemic Risk with Penalized Copula," SFB 649 Discussion Papers SFB649DP2015-038, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  • Handle: RePEc:hum:wpaper:sfb649dp2015-038

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    References listed on IDEAS

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    Cited by:

    1. Benjamin Poignard & Jean-David Fermanian, 2022. "The finite sample properties of sparse M-estimators with pseudo-observations," Annals of the Institute of Statistical Mathematics, Springer;The Institute of Statistical Mathematics, vol. 74(1), pages 1-31, February.
    2. Ostap Okhrin & Anastasija Tetereva, 2017. "The Realized Hierarchical Archimedean Copula in Risk Modelling," Econometrics, MDPI, vol. 5(2), pages 1-31, June.
    3. Nathan Uyttendaele, 2018. "On the estimation of nested Archimedean copulas: a theoretical and an experimental comparison," Computational Statistics, Springer, vol. 33(2), pages 1047-1070, June.

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    More about this item


    Conditional quantile; Copula; Financial contagion; Spill-over e ect; Stepwise penalized ML estimation; Systemic risk; Tail dependence;
    All these keywords.

    JEL classification:

    • C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General
    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services

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