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

Jaeho Yun () and Hyejung Moon ()
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Jaeho Yun: Department of Economics, Ewha Womans University
Hyejung Moon: Systemic Risk Analysis Team, Marcroprudential Analysis Department, The Bank of Korea

No 2013-27, Working Papers from Economic Research Institute, 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.

Keywords: Systemic Risk; DCC (dynamic conditional correlation) model; MES (marginal expected shortfall); CoVaR; Threshold VAR (search for similar items in EconPapers)
JEL-codes: C22 G21 G28 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2013-12-17
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