Measuring systemic risk via GAS models and extreme value theory: Revisiting the 2007 financial crisis

Pedro Gerhardt Gavronski and Flavio A. Ziegelmann

Finance Research Letters, 2021, vol. 38, issue C

Abstract: The advent of the 2007 financial crisis showed that risk measures formulated so far did not perform as expected. This poor performance may bring serious consequences for the system stability, possibly causing very adverse effects on the banking and insurance industries. In this paper we propose a new systemic risk measure based on extreme value theory, the Financial System Dependence Index (FSDI) which uses the spread of Credit Default Swaps (CDS) of financial institutions as the data source. Furthermore we add time dynamics for this measure, which is described by a GAS model. We motivate the quality of FSDI by comparing it to the risk measure proposed by Segoviano and Goodhart (2009), the Bank Stability Index (BSI), through a horse race based on the ideas of Rodríguez-Moreno and Peña (2013). In our empirical analysis, FSDI outperformed BSI.

Keywords: Systemic risk; GAS; CDS; Pareto; Extreme value (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:38:y:2021:i:c:s1544612320301082

DOI: 10.1016/j.frl.2020.101498

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