Financial Risk Meter for emerging markets

Souhir Ben Amor, Michael Althof and Wolfgang Härdle

Research in International Business and Finance, 2022, vol. 60, issue C

Abstract: In this paper, the daily systemic risk measure FRM (Financial Risk Meter) is proposed for emerging markets (FRM@EM). The FRM@EM is applied to capture systemic risk behavior embedded in the returns of the 25 largest EMs’ Financial Institutions (FIs), covering the BRIMST (Brazil, Russia, India, Mexico, South Africa, and Turkey), and thereby reflects the financial linkages between these economies. The results indicate that the FRM of EMs’ FIs reached its maximum during the US financial crisis following the COVID-19 crisis. In addition, we find that the Macro factors explain the BRIMST's FIs with various degrees of sensibility. Moreover, we propose a robust and well-diversified tail-event and cluster risk-sensitive portfolio allocation model named uplifted hierarchical risk parity (upHRP) and compare it to more classical approaches. Results indicate that the upHRP approach provides better diversification. Moreover, the upHRP portfolio overweights low-central FIs and underweights high-central ones.

Keywords: FRM (Financial Risk Meter); Lasso quantile regression; Financial network; Emerging markets; Hierarchical risk parity (search for similar items in EconPapers)
JEL-codes: C30 C58 G11 G15 G21 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:60:y:2022:i:c:s0275531921002154

DOI: 10.1016/j.ribaf.2021.101594

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