DP12178 Back to the Future: Backtesting Systemic Risk Measures during Historical Bank Runs and the Great Depression
|Author(s):||Christian Brownlees, Ben Chabot, Eric Ghysels, Christopher Kurz|
|Publication Date:||July 2017|
|Keyword(s):||Financial crises, Risk Measures, systemic risk|
|JEL(s):||G01, G21, G28, N21|
|Programme Areas:||Financial Economics, Economic History|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=12178|
We evaluate the performance of two popular systemic risk measures, CoVaR and SRISK, during eight financial panics in the era before FDIC insurance. Bank stock price and balance sheet data were not readily available for this time period. We rectify this shortcoming by constructing a novel dataset for the New York banking system before 1933. Our evaluation exercise focuses on assessing whether systemic risk measures were able to detect systemically important financial institutions and to provide early warning signals of aggregate financial sector turbulence. The predictive ability of CoVaR and SRISK is measured controlling for a set of commonly employed market risk measures and bank ratios. We find that CoVaR and SRISK help identifying systemic institutions in periods of distress beyond what is explained by standard risk measures up to six months prior to the panic events. Increases in aggregate CoVaR and SRISK precede worsening conditions in the financial system; however, the evidence of predictability is weaker.