# Tail event driven networks of SIFIs

*Cathy Yi-Hsuan Chen*,
*Wolfgang Karl Härdle* and
*Yarema Okhrin*

*Journal of Econometrics*, 2019, vol. 208, issue 1, 282-298

**Abstract:**
The interdependence, dynamics and riskiness of financial institutions are the key features frequently tackled in financial econometrics. We propose a Tail Event driven Network Quantile Regression (TENQR) model which addresses these three aspects. More precisely, our framework captures the risk propagation and dynamics in terms of a panel quantile autoregression involving network effects that are quantified through a time-varying adjacency matrix. To reflect the risk content in stress situations the construction of the adjacency matrix is suggested to include tail events. More precisely we employ the conditional expected shortfall as risk profile. Based on the similarity of the risk profiles we create a positive and a negative network factor, which capture the effects of risk contagion and risk diversification respectively. The developed joint spacings variance ratio test supports the suggested methodology. The TENQR technique is evaluated using the SIFIs (systemically important financial institutions) identified by the Financial Stability Board (FSB). The risk decomposition of the resulting network identifies the systemic importance of SIFIs and thus provides measures for the required level of additional loss absorbency. It is discovered that the positive network effect, as a function of the tail probability level, becomes more profound in stress situations and varies in its impact to SIFIs located in different geographic regions.

**Keywords:** Systemic risk; Network analysis; Network autoregression; Tail event (search for similar items in EconPapers)

**JEL-codes:** C01 C14 C58 C45 G01 G15 G31 (search for similar items in EconPapers)

**Date:** 2019

**References:** View references in EconPapers View complete reference list from CitEc

**Citations:** View citations in EconPapers (4) Track citations by RSS feed

**Downloads:** (external link)

http://www.sciencedirect.com/science/article/pii/S0304407618301829

Full text for ScienceDirect subscribers only

**Related works:**

This item may be available elsewhere in EconPapers: Search for items with the same title.

**Export reference:** BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text

**Persistent link:** https://EconPapers.repec.org/RePEc:eee:econom:v:208:y:2019:i:1:p:282-298

**DOI:** 10.1016/j.jeconom.2018.09.016

Access Statistics for this article

Journal of Econometrics is currently edited by *T. Amemiya*, *A. R. Gallant*, *J. F. Geweke*, *C. Hsiao* and *P. M. Robinson*

More articles in Journal of Econometrics from Elsevier

Bibliographic data for series maintained by Haili He ().