Comparing tail risk and systemic risk profiles for different types of US financial institutions
Stefan Straetmans & Thanh Thi Huyen Dinha – Maastricht University (School of Business and Economics)

We define market-based indicators of tail risk and systemic risk for financial institutions. More specifically, we apply statistical extreme value analysis to the tails of the institutions’ equity capital losses. We evaluate tail risk by means of the likelihood of individual institutions’ financial distress whereas institution’s systemic importance is measured by means of the likelihood that individual institutions are triggered into distress by aggregate shocks (extreme systematic risk or “tail-β’s”). Dividing 91 top US financial institutions into four industry groups as in Acharya et al. (2010) and Brownlees and Engle (2012) enables one to make cross-industry tail risk and systemic risk comparisons. Insurance companies exhibit the highest equity tail risk. Somewhat surprisingly, deposit banks (and not broker-dealers) seem to be most strongly exposed to adverse aggregate shocks. Also, extreme systematic risk seems to exhibit some predictability towards future distress as the rank correlations between pre-crisis and crisis tail-β’s are found to be relatively high. Finally, institutional size proxies are not strongly correlated with tail risk (no diversification effect for larger institutions); but size seems correlated with our systemic risk measure. However, the size and ranking results vary considerably across industries and across time.


Stefan Straetmans

I am an Associate Professor of Finance at Maastricht University in the Netherlands. My Ph.D. thesis (at Erasmus University Rotterdam) was entitled “Extreme Financial Returns and their Comovements” and contained essays on international finance as well as applications of extreme value analysis in finance and investments.
My research interests include, inter alia, exchange rate behavior, banking system stability and the modeling and measurement of systemic risk, financial risk and financial crisis management, financial market contagion, linkages and integration. Parts of my work has been published in international academic journals like the Review of Economics and Statistics, the Journal of Applied Econometrics, Oxford Bulletin of Economics and Statistics, the Journal of International Money and Finance and the Journal of Banking and Finance. To know more…

 

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