Modeling financial sector joint tail risk in the euro area

Bernd Schwaab, Andre Lucas and Xin Zhang

No 1837, Working Paper Series from European Central Bank

Abstract: We develop a novel high-dimensional non-Gaussian modeling framework to infer measures of conditional and joint default risk for numerous financial sector firms. The model is based on a dynamic Generalized Hyperbolic Skewed-t block-equicorrelation copula with time-varying volatility and dependence parameters that naturally accommodates asymmetries, heavy tails, as well as non-linear and time-varying default dependence. We apply a conditional law of large numbers in this setting to define joint and conditional risk measures that can be evaluated quickly and reliably. We apply the modeling framework to assess the joint risk from multiple defaults in the euro area during the 2008-2012 financial and sovereign debt crisis. We document unprecedented tail risks between 2011-2012, as well as their steep decline following subsequent policy actions. JEL Classification: G21, C32

Keywords: dynamic equicorrelation; generalized hyperbolic distribution; large portfolio approximation; law of large numbers (search for similar items in EconPapers)
Date: 2015-08
New Economics Papers: this item is included in nep-ecm and nep-rmg
Note: 955417
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Modeling Financial Sector Joint Tail Risk in the Euro Area (2017)
Working Paper: Modeling financial sector joint tail risk in the euro area (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20151837

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