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Systemic Risk of Commercial Banks: A Markov-Switching Quantile Autoregression Approach

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  • Liu, Xiaochun

Abstract

This paper extends the Conditional Value-at-Risk approach of Adrian and Brunnermeier (2011) by allowing systemic risk structures subject to economic regime shifts, which are governed by a discrete, latent Markov process. This proposed Markov-Switching Conditional Value-at-Risk is more suitable to Supervisory Stress Scenario required by FederalReserve Bank in conducting Comprehensive Capital Analysis and Review, since it is ca-pable of identifying the risk states in which the estimated risk levels are characterized. Applying MSCoVaR to stress-testing the U.S. largest commercial banks, this paper finds that the CoVaR approach underestimates systemic risk contributions of individual banks by around 131 basis points of asset loss on average. In addition, this paper constructs Banking Systemic Risk Index by value-weighted individual risk contributions for specifically monitoring the systemic risk of the banking system as a whole.

Suggested Citation

  • Liu, Xiaochun, 2013. "Systemic Risk of Commercial Banks: A Markov-Switching Quantile Autoregression Approach," MPRA Paper 55801, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:55801
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    References listed on IDEAS

    as
    1. López-Espinosa, Germán & Moreno, Antonio & Rubia, Antonio & Valderrama, Laura, 2012. "Short-term wholesale funding and systemic risk: A global CoVaR approach," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3150-3162.
    2. Rodríguez-Moreno, María & Peña, Juan Ignacio, 2013. "Systemic risk measures: The simpler the better?," Journal of Banking & Finance, Elsevier, vol. 37(6), pages 1817-1831.
    3. Rungporn Roengpitya & Phurichai Rungcharoenkitkul, 2010. "Measuring Systemic Risk And Financial Linkages In The Thai Banking System," Working Papers 2010-02, Monetary Policy Group, Bank of Thailand.
    4. Dimitrios Bisias & Mark Flood & Andrew W. Lo & Stavros Valavanis, 2012. "A Survey of Systemic Risk Analytics," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 255-296, October.
    5. International Monetary Fund, 2012. "Short-Term Wholesale Funding and Systemic Risk: A Global Covar Approach," IMF Working Papers 2012/046, International Monetary Fund.
    6. Koenker, Roger & Xiao, Zhijie, 2006. "Quantile Autoregression," Journal of the American Statistical Association, American Statistical Association, vol. 101, pages 980-990, September.
    7. Adams, Zeno & Füss, Roland & Gropp, Reint, 2014. "Spillover Effects among Financial Institutions: A State-Dependent Sensitivity Value-at-Risk Approach," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 49(3), pages 575-598, June.
    8. Maarten van Oordt & Chen Zhou, 2011. "Systematic risk under extremely adverse market condition," DNB Working Papers 281, Netherlands Central Bank, Research Department.
    9. Wong, Alfred Y-T. & Fong, Tom Pak Wing, 2011. "Analysing interconnectivity among economies," Emerging Markets Review, Elsevier, vol. 12(4), pages 432-442.
    10. Mauricio Arias & Juan Carlos Mendoza & David Perez-Reyna, 2011. "Applying CoVaR to measure systemic market risk: the Colombian case," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Proceedings of the IFC Conference on "Initiatives to address data gaps revealed by the financial crisis", Basel, 25-26 August 2010, volume 34, pages 351-364, Bank for International Settlements.
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    More about this item

    Keywords

    Markov-Switching Conditional Value-at-Risk; Conditional Expected Shortfall; Bayesian Quantile Inference; Stress-testing; Value-at-Risk; Commercial Banks; Banking Systemic Risk Index;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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