“A European sectorial-based risk analysis: Assessment of the systemic risk using CoVaR”

Details

Supervisors

Alain de Crombrugghe de Pickendaele

Faculty

Faculté des sciences économiques, sociales, politiques et de communication

Degree label

Master [120] en sciences économiques, orientation générale

Abstract

CoVaR and ΔCoVaR are two risk measure that aim to asses respectively the financial spillover effect and systemic risk contribution of institutions. This method, first developed by Adrian and Brunnermeier (2011) showed to be a popular technique in the systemic risk research field. CoVaR is defined as the q%-th VaR of an institution conditioned by the q%-th VaR of another institution representing different financial states. In this paper, we use the CoVaR on the different European economic sectors in order to measure the spillover effect of each sector and their systemic risk contribution over the period from the second February 2001 up to the 1rst of April 2018. We apply the quantile regression on data which are taken from market available indexes returns. Our results tends to indicate that the sectors most at risk were Banks, Insurance and Basic resources. We also find that among the sectors with the highest spillovers when in distress are Banks and Real estate. Time dependent estimates show that the sectorial risks taken in isolation tends to evolve concomitantly and with a similar amplitude across sectors which does not seem to be the case for the spillover effect of these sectors. The systemic risk contribution also has a very different pattern across sectors through time. Following this observation, we conclude that there is no positive correlation between the fact that a sector might be risky by nature and the fact that it bears contagion risk or contributes more to the systemic risk. Therefore we can say that it is not because a sector is very risky (because it has a high VaR), that we could expect this sector to have high spillover effect (as measured by their CoVaR).