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Construction of Bank’s Systemic Importance and the Systemic Risk with MES Model

Author: ShenZuoLi
Tutor: OuYangHongBing
School: Huazhong University of Science and Technology
Course: Finance
Keywords: Systemic Risk cDCC/TARCH Model MES Volatility Correlations
CLC: F832.3
Type: Master's thesis
Year: 2012
Downloads: 13
Quote: 0
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Abstract


In this paper, I study theoretical methods how to measure a bank’s systemic risk andsystemic importance, use empirical analysis to analyze the systemic importance ofindividual bank, analysis of the reasons of generating such importance and the methods tocontrol the systemic risk of each bank. On the basis of research of Acharya et al (2010),we make the definition of systemic risk of a financial institution as the amount ofcontribution of the institution that can be expected to the aggregate capital shortfall offinancial system when crisis occurs in the future. I measure systemic risk as the expectedcapital shortfall based on a given financial leverage of the company and marginal expectedshortfall(MES). In order to estimate the MES and to give more reasonable values than theprevious results, I will introduce a dynamic model of returns of the market and thecompany. MES specified by the time-varying volatility and correlation, respectivelyestimated by TARCH model and cDCC model. I take advantage of several relatively smalljoint-stock commercial banks-Shenzhen Development Bank, China Merchants Bank,Construction Bank to form a small banking system and three other large state-ownedcommercial banks to form another bigger banking system. Successfully predicted capitallosses of the banks before the crisis, during and after, and favorably compared the results,as well as their respective systems risk contribution, namely the systemic importance ofthe bank. The results show that the2007-2008financial crisis and the debt crisis inEurope in2010brought shocks to the Chinese banks, and it makes the bank’s returnfluctuate more intensely, the correlation of the banks and market grow up, as well as lossesrise. The results and actual situation are in consistence. Fortunately, the analysis of theimportance of the various banks has practical significance. According to the researchprocess and results, we should control the size of banks and business contents, andincrease the level of transparency of information, and then we can be able to effectivelycontrol systemic risk.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Financial organizations, banks
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