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Enhancing Banking Systemic Risk Indicators by Incorporating Volatility Clustering, Variance Risk Premiums, and Considering Distance-To-Capital

Cevik, Emrah Ismail, Kenc, Turalay, Goodell, John W. ORCID: https://orcid.org/0000-0003-4126-9244 and Gunay, Samet (2024) Enhancing Banking Systemic Risk Indicators by Incorporating Volatility Clustering, Variance Risk Premiums, and Considering Distance-To-Capital. International Review of Economics and Finance, 97 . DOI 10.1016/j.iref.2024.103779

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Official URL: https://doi.org/10.1016/j.iref.2024.103779


Abstract

We develop a systemic risk indicator approach using a structural GARCH option-based default risk framework incorporating volatility clustering, variance risk premiums, along with distanceto-capital features. We apply our model to the U.S. banking sector, testing its explanatory and forecasting power. Our model successfully identifies the most systemically risky banks during heightened systemic-risk episodes. Comparing our results to related approaches, especially the respected indicator of the Federal Reserve Bank of Cleveland, we evidence markedly improved performance. Given the recent implosion of Silicon Valley Bank, exploring new approaches to constructing banking systemic risk indicators should be of great interest to regulators and policy makers.

Item Type:Article
Uncontrolled Keywords:Distance-to-Capital ; Systemic risk ; Volatility clustering ; Variance risk premiums ; Expected shortfall
JEL classification:G01 - Financial Crises
G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
G28 - Financial Institutions and Services: Government Policy and Regulation
Divisions:Faculty of Business Administration > Institute for Business Law
Subjects:Finance
DOI:10.1016/j.iref.2024.103779
ID Code:10792
Deposited By: MTMT SWORD
Deposited On:15 Jan 2025 15:09
Last Modified:15 Jan 2025 15:09

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