CEBA talks 2020-2022
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Authors:  Aleksy Leeuwenkamp

Abstract: In this paper the Δ-CoVaR method is extended in both the conditional and unconditional cases to be based on the Expected Shortfall (ES) using quantile regression with a more expansive distress definition. We find the resulting Δ-CoES measure to be complementary to the Δ-CoVaR and to be more effective than the Δ-CoVaR in measuring short-term changes in systemic risk and in identifying heterogeneity in the systemic risk contributions of financial institutions and linkages between institutions due to its lower robustness. For regulators, risk managers and market participants these properties are interesting from an economic standpoint when they require the increased sensitivity and heterogeneity of the Δ-CoES to set short-term capital requirements/risk limits, find problematic financial linkages, problematic financial institutions or have some kind of early warning system for the emergence of systemic risk. Lastly, the Δ-CoES is straightforward to estimate and would fit within recent regulatory frameworks such as the FRTB. To show the statistical advantages and properties empirically, the Δ-CoVaR and Δ-CoES methods are used on a large sample (from 31-12-1970 to 31-12-2020 1564 firms) of daily equity data from US financial institutions both in a system and network fashion. On a sample of 9 US-based GSIBS we also show the properties and the utility of the Δ-CoES when it comes to identifying problematic financial links.

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