Modeling financial sector joint tail risk in the euro area
Andre Lucas (),
Bernd Schwaab and
No 308, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)
We develop a novel high-dimensional non-Gaussian modeling framework to infer measures of conditional and joint default risk for many financial sector firms. The model is based on a dynamic Generalized Hyperbolic Skewed-t block-equicorrelation copula with time-varying volatility and dependence parameters that naturally accommodates asymmetries, heavy tails, as well as non-linear and time-varying default dependence. We apply a conditional law of large numbers in this setting to define joint and conditional risk measures that can be evaluated quickly and reliably. We apply the modeling framework to assess the joint risk from multiple defaults in the euro area during the 2008–2012 financial and sovereign debt crisis. We document unprecedented tail risks during 2011–2012, as well as their steep decline after subsequent policy actions.
Keywords: dynamic equicorrelation; generalized hyperbolic distribution; law of large numbers; large portfolio approximation (search for similar items in EconPapers)
JEL-codes: C32 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-fmk and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
http://www.riksbank.se/Documents/Rapporter/Working ... rap_wp308_150910.pdf (application/pdf)
Journal Article: Modeling Financial Sector Joint Tail Risk in the Euro Area (2017)
Working Paper: Modeling financial sector joint tail risk in the euro area (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:hhs:rbnkwp:0308
Access Statistics for this paper
More papers in Working Paper Series from Sveriges Riksbank (Central Bank of Sweden) Sveriges Riksbank, SE-103 37 Stockholm, Sweden. Contact information at EDIRC.
Bibliographic data for series maintained by Lena Löfgren ().