Working Paper: CEPR ID: DP12178
Authors: Christian Brownlees; Ben Chabot; Eric Ghysels; Christopher Kurz
Abstract: We evaluate the performance of two popular systemic risk measures, CoVaR and SRISK, during eight financial panics in the era before FDIC insurance. Bank stock price and balance sheet data were not readily available for this time period. We rectify this shortcoming byconstructing a novel dataset for the New York banking system before 1933. Our evaluation exercise focuses on assessing whether systemic risk measures were able to detect systemically important financial institutions and to provide early warning signals of aggregate financial sector turbulence. The predictive ability of CoVaR and SRISK is measured controlling for a set of commonly employed market risk measures and bank ratios. We find that CoVaR and SRISK help identifying systemic institutions in periods of distress beyond what is explained by standard risk measures up to six months prior to the panic events. Increases in aggregate CoVaR and SRISK precede worsening conditions in the financial system; however, the evidence of predictability is weaker.
Keywords: systemic risk; financial crises; risk measures
JEL Codes: G01; G21; G28; N21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increases in aggregate covar and srisk (C10) | worsening conditions in the financial system (F65) |
| covar and srisk identify systemic institutions (P34) | identification of systemically important financial institutions (G28) |
| covar and srisk (C10) | deposit declines during panic periods (E44) |
| economic contractions (E32) | stronger predictive power for deposit losses (G21) |
| economic expansions (E32) | diminished forecasting ability of covar and srisk (G17) |