Measuring systemic risk in the Korean banking sector via dynamic conditional correlation models

Jaeho Yun, Hyejung Moon
2014 Pacific-Basin Finance Journal  
In this paper we study systemic risks in the Korean banking sector by using two famous systemic risk measuresthe 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
more » ... anks. 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 measurethe aggregate MESand its associated threshold value for use as an early warning indicator.
doi:10.1016/j.pacfin.2014.02.005 fatcat:2swc5zhrzncc7evdbyq5kjcpzm