FRM Financial Risk Meter
ISBN: 978-1-83867-576-9, eISBN: 978-1-83867-575-2
Publication date: 19 October 2020
Abstract
A systemic risk measure is proposed accounting for links and mutual dependencies between financial institutions utilizing tail event information. Financial Risk Meter (FRM) is based on least absolute shrinkage and selection operator quantile regression designed to capture tail event co-movements. The FRM focus lies on understanding active set data characteristics and the presentation of interdependencies in a network topology. Two FRM indices are presented, namely, FRM@Americas and FRM@Europe. The FRM indices detect systemic risk at selected areas and identify risk factors. In practice, FRM is applied to the return time series of selected financial institutions and macroeconomic risk factors. The authors identify companies exhibiting extreme “co-stress” as well as “activators” of stress. With the SRM@EuroArea, the authors extend to the government bond asset class, and to credit default swaps with FRM@iTraxx. FRM is a good predictor for recession probabilities, constituting the FRM-implied recession probabilities. Thereby, FRM indicates tail event behavior in a network of financial risk factors.
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Acknowledgements
Acknowledgement
This research has received funding from the European Union's Horizon 2020 research and innovation program ‘FIN-TECH: A Financial supervision and Technology compliance training programme’ under the grant agreement No 825215 (Topic: ICT-35-2018, Type of action: CSA).
Citation
Mihoci, A., Althof, M., Chen, C.Y.-H. and Härdle, W.K. (2020), "FRM Financial Risk Meter", de Paula, Á., Tamer, E. and Voia, M.-C. (Ed.) The Econometrics of Networks (Advances in Econometrics, Vol. 42), Emerald Publishing Limited, Leeds, pp. 335-368. https://doi.org/10.1108/S0731-905320200000042016
Publisher
:Emerald Publishing Limited
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