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Estimating A Joint Probability Of Default Index For Indonesian Banks: A Copula Approach

Author

Listed:
  • Zaafri Ananto Husodo

    (Universitas Indonesia)

  • Sigit Sulistyo Wibowo

    (Universitas Indonesia)

  • Muhammad Budi Prasetyo

    (Universitas Indonesia)

  • Usman Arief

    (Universitas Indonesia)

  • Maulana Harris Muhajir

    (Bank Indonesia)

Abstract

We develop a joint default probability index to signal potential systemic risks in the highly concentrated Indonesian banking industry. To build the index, we estimate bank-level tail risks using monthly bank financial reports. We use the copula approach to derive the joint multivariate dependencies at the bank level, as reflected in the monthly financial reports. Our results, which are based on a sample of 104 banks fromDecember 2003 to April 2020, show joint multivariate dependencies at the bank level suggesting that the standard univariate normal distribution is unsuitable for capturing tail risks of individual banks. Our index accurately captures the global financial crisis of 2007-2008 indicating that it is a valid joint default probability index. Further, our index also signaled a higher degree of joint default before the COVID-19 outbreak in2020, suggesting that it is a good indicator of potential systemic risk in the economy.

Suggested Citation

  • Zaafri Ananto Husodo & Sigit Sulistyo Wibowo & Muhammad Budi Prasetyo & Usman Arief & Maulana Harris Muhajir, 2020. "Estimating A Joint Probability Of Default Index For Indonesian Banks: A Copula Approach," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 23(3), pages 387-410, October.
    • Handle: RePEc:idn:journl:v:23:y:2020:i:3e:p:387-410
    DOI: https://doi.org/10.21098/bemp.v23i3.1358
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    More about this item

    Keywords

    Copula; Pair copula construction; Systemic risk; Financial system;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

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