Quantifying endogenous and exogenous shocks to financial sector systemic risk: A comparison of GFC and COVID-19

Muhammad Usman, Zaghum Umar, Sun-Yong Choi and Tamara Teplova

The Quarterly Review of Economics and Finance, 2024, vol. 94, issue C, 281-293

Abstract: In this study, we use segregated endogenous and exogenous shocks to large banks’ returns to compare the effect of each on financial sector systemic risk. We use the copula-CoVaR methodology and GARCH (1,1) with time-varying moments to model the marginal distribution function and bivariate probability distribution of the tail returns. We find that endogenous risk dominates exogenous risk in the financial system. A comparison of the 2008 global financial crisis and COVID-19 reveals that the crisis aggravates only as exogenous shocks to the system persist. Additionally, we find that large banks reduce the total risk of the system in normal times but increase the risk of the financial system in crisis times. Our findings have important implications for policymakers, investors, and portfolio managers.

Keywords: Financial sector systemic risk; Endogenous and Exogenous Shock; Copula-CoVaR; 2008 global financial crisis; COVID-19 pandemic (search for similar items in EconPapers)
JEL-codes: G00 G21 G28 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:94:y:2024:i:c:p:281-293

DOI: 10.1016/j.qref.2024.02.004

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