Measuring systemic risk contribution of global stock markets: A dynamic tail risk network approach

Ze Wang, Xiangyun Gao, Shupei Huang, Qingru Sun, Zhihua Chen, Renwu Tang and Zengru Di

International Review of Financial Analysis, 2022, vol. 84, issue C

Abstract: Measuring the systemic risk contribution (SRC) of country-level stock markets helps understand the rise of extreme risks in the worldwide stock system to prevent potential financial crises. This paper proposes a novel SRC measurement based on quantifying tail risk propagation's domino effect using ΔCoVaR and the cascading failure network model. While ΔCoVaR captures the tail dependency structure among stock markets, the cascading failure network model captures the nonlinear dynamic characteristics of tail risk contagion to mimic tail risk propagation. As an illustration, we analyze 73 markets' SRCs using a daily closing price dataset from 1990.12.19 to 2020.9.8. The validity test demonstrates that our method outperforms seven classic methods as it helps early warning global financial crises and correlates to many systemic risk determinants, e.g., the market liquidity, leverage, inflation, and fluctuation. The empirical results identify that Southeast European markets have higher SRCs with time-varying and momentum features corresponding to significant financial crisis events. Besides, it needs attention that South American and African markets have displayed increasing risk contributions since 2018. Overall, our results highlight that considering tail risk contagion's dynamic characteristics helps avoid underestimating SRC and supplement a “too cascading impactive to fail” perspective to improve financial crisis prevention.

Keywords: Systemic risk contribution; Tail risk contagion; ΔCoVaR; Volatility spillover network; Cascading failure (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:84:y:2022:i:c:s1057521922003118

DOI: 10.1016/j.irfa.2022.102361

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