Systemic risk allocation using the asymptotic marginal expected shortfall

X Qin; Chen Zhou

doi:10.1016/j.jbankfin.2021.106099

Systemic risk allocation using the asymptotic marginal expected shortfall

X Qin, Chen Zhou

Research output: Contribution to journal › Article › Academic › peer-review

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Abstract

This paper defines asymptotic marginal expected shortfall (AMES) for banks within a financial system and provides corresponding estimation method based on multivariate extreme value theory. The estimation method does not assume a specific dependence structure among bank equity returns. Both theoretical AMES and the estimator possess additive property and thus can serve as a tool to allocate system-wide risk to individual institutions. We apply the AMES to 30 global systemically important financial institutions (G-SIFIs). We show that the AMES outperforms the MES in predicting extreme losses during extreme systemic events. By taking the AMES as the reference point for allocating systemic risk to individual institutions, we show that an allocation according to simple bank characteristics such as size and individual risk can be imperfect. The allocation unfairness of individual risk or size across all the G-SIFIs has increased since 2008.

Original language	English
Article number	106099
Journal	Journal of Banking and Finance
Volume	126
DOIs	https://doi.org/10.1016/j.jbankfin.2021.106099
Publication status	Published - May 2021

Bibliographical note

Funding Information:
Xiao Qin's research was funded by Shanghai Pujiang Program (No. 2019PJC071), NSFC grants (No. 71471115, 71790592, 71850010, 71772121), and an NSFC-NWO grant (No. 71211130310 and No. 2012/07448/BOO), all of which are gratefully acknowledged. A large part of the work was done when Xiao Qin was visiting Erasmus University Rotterdam and she would like to thank Erasmus School of Economics for the hospitality. The views expressed are those of the authors and do not reflect official positions of De Nederlandsche Bank.

Funding Information:
Xiao Qin’s research was funded by Shanghai Pujiang Program (No. 2019PJC071), NSFC grants (No. 71471115, 71790592, 71850010, 71772121), and an NSFC-NWO grant (No. 71211130310 and No. 2012/07448/BOO), all of which are gratefully acknowledged. A large part of the work was done when Xiao Qin was visiting Erasmus University Rotterdam and she would like to thank Erasmus School of Economics for the hospitality. The views expressed are those of the authors and do not reflect official positions of De Nederlandsche Bank.

Publisher Copyright:
© 2021 The Author(s)

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1-s2.0-S0378426621000571-mainFinal published version, 742 KBLicence: CC BY

http://hdl.handle.net/1765/135231

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title = "Systemic risk allocation using the asymptotic marginal expected shortfall",

abstract = "This paper defines asymptotic marginal expected shortfall (AMES) for banks within a financial system and provides corresponding estimation method based on multivariate extreme value theory. The estimation method does not assume a specific dependence structure among bank equity returns. Both theoretical AMES and the estimator possess additive property and thus can serve as a tool to allocate system-wide risk to individual institutions. We apply the AMES to 30 global systemically important financial institutions (G-SIFIs). We show that the AMES outperforms the MES in predicting extreme losses during extreme systemic events. By taking the AMES as the reference point for allocating systemic risk to individual institutions, we show that an allocation according to simple bank characteristics such as size and individual risk can be imperfect. The allocation unfairness of individual risk or size across all the G-SIFIs has increased since 2008.",

author = "X Qin and Chen Zhou",

note = "Funding Information: Xiao Qin's research was funded by Shanghai Pujiang Program (No. 2019PJC071), NSFC grants (No. 71471115, 71790592, 71850010, 71772121), and an NSFC-NWO grant (No. 71211130310 and No. 2012/07448/BOO), all of which are gratefully acknowledged. A large part of the work was done when Xiao Qin was visiting Erasmus University Rotterdam and she would like to thank Erasmus School of Economics for the hospitality. The views expressed are those of the authors and do not reflect official positions of De Nederlandsche Bank. Funding Information: Xiao Qin{\textquoteright}s research was funded by Shanghai Pujiang Program (No. 2019PJC071), NSFC grants (No. 71471115, 71790592, 71850010, 71772121), and an NSFC-NWO grant (No. 71211130310 and No. 2012/07448/BOO), all of which are gratefully acknowledged. A large part of the work was done when Xiao Qin was visiting Erasmus University Rotterdam and she would like to thank Erasmus School of Economics for the hospitality. The views expressed are those of the authors and do not reflect official positions of De Nederlandsche Bank. Publisher Copyright: {\textcopyright} 2021 The Author(s)",

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N2 - This paper defines asymptotic marginal expected shortfall (AMES) for banks within a financial system and provides corresponding estimation method based on multivariate extreme value theory. The estimation method does not assume a specific dependence structure among bank equity returns. Both theoretical AMES and the estimator possess additive property and thus can serve as a tool to allocate system-wide risk to individual institutions. We apply the AMES to 30 global systemically important financial institutions (G-SIFIs). We show that the AMES outperforms the MES in predicting extreme losses during extreme systemic events. By taking the AMES as the reference point for allocating systemic risk to individual institutions, we show that an allocation according to simple bank characteristics such as size and individual risk can be imperfect. The allocation unfairness of individual risk or size across all the G-SIFIs has increased since 2008.

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Systemic risk allocation using the asymptotic marginal expected shortfall

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