Systemic risk measurement in the Eurozone - A multivariate GARCH estimation of CoVaR

Abstract: In this essay the systemic risk contributions of financial institutions in the European Monetary Union are analyzed. For this purpose the CoVaR measure, first introduced by Adrian and Brunnermeier (2011), is applied. The definition of CoVaR is changed in the way that 1) the definition of financial distress is changed from an institution being exactly at its VaR-level to being at most at its VaR, and 2) the CoVaR measure is extended to allow for measuring the systemic risk contribution of a group of banks. For the calculations of CoVaR an underlying student t-distribution for the returns is assumed. Volatility and time-varying correlations between the institutions and the system are modeled using a GARCH-DCC approach. The systemic risk contribution is then obtained by solving numerically for ∆CoVaR. The calculations are based on daily return data of 32 banks from 10 Eurozone countries covering the period 1 st May 2005 to 1 st May 2015. The analysis of the results of the collective systemic risk contribution by country receives extra attention.