Chen, C. Y.-H. and Nasekin, S. (2020) Quantifying systemic risk with factor copulas. European Journal of Finance, 26(18), pp. 1926-1947. (doi: 10.1080/1351847X.2020.1828961)
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Abstract
We propose a tail dependence based network approach to study systemic risk in a network of systemically important financial institutions (SIFIs). We utilize a flexible factor copula based method which allows to measure the level of extreme risk in a portfolio when dependence is driven by one or several factors. We identify the most ‘connected’ SIFIs based on an eigenvector centrality approach applied to copula-implied dependence structures as ‘central’ SIFIs. We then demonstrate that the level of systemic risk implied by such SIFIs chosen as conditioning factors in the factor copula setup exceeds that which is implied by non-central SIFIs in terms of portfolio Value-at-Risk and the portfolio return under stress. This study contributes to quantification and ranking of the systemic importance of SIFIs which is important for setting adequate capital requirements in particular and stability of financial markets in general.
Item Type: | Articles |
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Status: | Published |
Refereed: | Yes |
Glasgow Author(s) Enlighten ID: | Chen, Professor Cathy Yi-Hsuan |
Authors: | Chen, C. Y.-H., and Nasekin, S. |
College/School: | College of Social Sciences > Adam Smith Business School > Accounting and Finance |
Journal Name: | European Journal of Finance |
Publisher: | Taylor & Francis |
ISSN: | 1351-847X |
ISSN (Online): | 1466-4364 |
Published Online: | 06 October 2020 |
Copyright Holders: | Copyright © 2020 Taylor and Francis |
First Published: | First published in European Journal of Finance 26(18):1926-1947 |
Publisher Policy: | Reproduced in accordance with the copyright policy of the publisher |
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