Uncertainty in systemic risks rankings: Bayesian and frequentist analysis

Elena Goldman

Finance Research Letters, 2023, vol. 56, issue C

Abstract: We propose efficient Bayesian Hamiltonian Monte Carlo method for estimation of systemic risk measures, LRMES, SRISK and ΔCoVaR, and apply it for thirty global systemically important banks and for eighteen largest US financial institutions over the period of 2000–2020. The advantage of the Hamiltonian method is an efficient estimation of all parameters jointly in high dimensional models and providing posterior distributions incorporating parameter uncertainty. The systemic risk measures are computed based on the Dynamic Conditional Correlations model with generalized asymmetric volatility. We estimate the systemic risks posterior distributions and two-step maximum likelihood distributions with bootstrap simulations for LRMES. The systemic risk rankings at different quantiles of the distributions vary considerably using bootstrap approach for computation of LRMES and SRISK, and are more stable with Bayesian posterior distributions using a parametric model. A policymaker may choose to rank the firms using some quantile of their systemic risk distributions such as 90, 95, or 99% depending on risk preferences with higher quantiles being more conservative.

Keywords: Systemic risk; SRISK; CoVaR; Asymmetric volatility; Hamiltonian Monte Carlo; STAN (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:56:y:2023:i:c:s1544612323004002

DOI: 10.1016/j.frl.2023.104028

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