Conditional Systemic Risk with Penalized Copula
Jeffrey Sheen () and
Authors registered in the RePEc Author Service: Stefan Trueck ()
No SFB649DP2015-038, SFB 649 Discussion Papers from Humboldt University, Collaborative Research Center 649
Financial contagion and systemic risk measures are commonly derived from conditional quantiles by using imposed model assumptions such as a linear parametrization. In this paper, we provide model free measures for contagion and systemic risk which are independent of the speci - cation of conditional quantiles and simple to interpret. The proposed systemic risk measure relies on the contagion measure, whose tail behavior is theoretically studied. To emphasize contagion from extreme events, conditional quantiles are speci ed via hierarchical Archimedean copula. The parameters and structure of this copula are simultaneously estimated by imposing a non-concave penalty on the structure. Asymptotic properties of this sparse estimator are derived and small sample properties illustrated using simulations. We apply the proposed framework to investigate the interconnectedness between American, European and Australasian stock market indices, providing new and interesting insights into the relationship between systemic risk and contagion. In particular, our ndings suggest that the systemic risk contribution from contagion in tail areas is typically lower during times of nancial turmoil, while it can be signi cantly higher during periods of low volatility.
Keywords: Conditional quantile; Copula; Financial contagion; Spill-over e ect; Stepwise penalized ML estimation; Systemic risk; Tail dependence (search for similar items in EconPapers)
JEL-codes: C40 C46 C51 G1 G2 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-ore and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:hum:wpaper:sfb649dp2015-038
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