ESTIMATING A JOINT PROBABILITY OF DEFAULT INDEX FOR INDONESIAN BANKS: A COPULA APPROACH
Zaafri Ananto Husodo (),
Muhammad Budi Prasetyo,
Usman Arief and
Maulana Harris Muhajir
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Zaafri Ananto Husodo: Universitas Indonesia
Muhammad Budi Prasetyo: Universitas Indonesia
Usman Arief: Universitas Indonesia
Maulana Harris Muhajir: Bank Indonesia
Bulletin of Monetary Economics and Banking, 2020, vol. 23, issue 3, 387-410
We develop a joint default probability index to signal potential systemic risks in the highly concentrated Indonesian banking industry. To build the index, we estimate bank-level tail risks using monthly bank financial reports. We use the copula approach to derive the joint multivariate dependencies at the bank level, as reflected in the monthly financial reports. Our results, which are based on a sample of 104 banks fromDecember 2003 to April 2020, show joint multivariate dependencies at the bank level suggesting that the standard univariate normal distribution is unsuitable for capturing tail risks of individual banks. Our index accurately captures the global financial crisis of 2007-2008 indicating that it is a valid joint default probability index. Further, our index also signaled a higher degree of joint default before the COVID-19 outbreak in2020, suggesting that it is a good indicator of potential systemic risk in the economy.
Keywords: Copula; Pair copula construction; Systemic risk; Financial system (search for similar items in EconPapers)
JEL-codes: C15 G18 G21 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:idn:journl:v:23:y:2020:i:3e:p:387-410
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