TENET: Tail-Event-driven NETwork Risk Wolfgang Karl Härdle Weining Wang Lining Yu Ladislaus von Bortkiewicz Chair of Statistics C.A.S.E. - Center for Applied Statistics and Economics Humboldt–Universität zu Berlin http://lvb.wiwi.hu-berlin.de http://www.case.hu-berlin.de
Motivation 1-1 What is Systemic Risk? "I know it when I see it". Justice Potter Stewart, 1964. CFR CBSH SBNY WFC JPM BAC C 2009−06−12 ZION USB Depositories PBCT BOKF PNC COF Insurers HCBK BK Broker−Dealers HBAN STT Others TENET CMA KEY RF FITB STI BBT TAXI NICK AXP BEN CBG NTRS MTB BRO HCC AIG MET TRV SFE ATAX IVZ JLL MKL AJG AFL PRU AVHI AMG TMK CB WHG AGM OCN EV FNF WRB ALL MMC NEWS LM UNM AON ECPG WRLD FII CACC Y CINF PGR L NNI JNS PRAA AB OPY CLMS GS BLK MS LNC CNA PFG HIG GFIG LTS CME SCHW INTL TROW ITG PJC RJF AMTD BGCP SEIC DLLR WETF WDR NDAQ EEFT MKTX GBL SF
Motivation 1-2 What is Systemic Risk? Systemic risk is a "risk of financial instability so widespread that it impairs the functioning of a financial system to the point where economic growth and welfare suffer materially". ECB, Financial Network and Financial Stability, 2010. "Financial institutions are systemically important if the failure of the firm to meet its obligations to creditors and customers would have significant adverse consequences for the financial system and the broader economy". Daniel Tarullo, Regulatory Restructuring, 2009. CFR CBSH SBNY WFC JPM BAC C 2009−06−12 ZION USB Depositories BOKF PBCT PNC COF Insurers HCBK BK Broker−Dealers HBAN STT Others TENET CMA KEY RF FITB STI BBT TAXI NICK AXP BEN CBG NTRS MTB BRO HCC AIG MET TRV SFE ATAX IVZ JLL MKL AJG AFL PRU AVHI AMG TMK CB WHG AGM EV OCN FNF WRB MMC ALL NEWS LM UNM AON ECPG WRLD FII CACC CINF Y PGR L NNI JNS PRAA AB OPY CLMS GS BLK MS LNC CNA PFG HIG GFIG LTS CME SCHW INTL TROW ITG PJC RJF AMTD BGCP SEIC DLLR WETF WDR NDAQ EEFT MKTX GBL SF
Motivation 1-3 What is Systemic Risk? Figure 1: Systemic Risk? CFR CBSH SBNY WFC JPM BAC C 2009−06−12 ZION USB Depositories PBCT BOKF PNC COF Insurers HCBK BK Broker−Dealers HBAN STT Others TENET CMA KEY RF FITB STI BBT TAXI NICK AXP BEN CBG NTRS MTB BRO HCC AIG MET TRV SFE ATAX IVZ JLL MKL AJG AFL PRU AVHI AMG TMK CB WHG AGM OCN EV FNF WRB ALL MMC NEWS LM UNM AON ECPG WRLD FII CACC Y CINF PGR L NNI JNS PRAA AB OPY CLMS GS BLK MS LNC CNA PFG HIG GFIG LTS CME SCHW INTL TROW PJC ITG RJF AMTD BGCP SEIC DLLR WETF WDR NDAQ EEFT MKTX GBL SF
Motivation 1-4 CoVaR as a Systemic Risk Measure Step 1. Estimate linear quantile regressions X i , t = α i + γ i M t − 1 + ε i , t , X j , t = α j | i + γ j | i M t − 1 + β j | i X i , t + ε j | i , t , where ⊡ X i , t is the log return of a financial institution i , ⊡ M t − 1 are lagged macro state variables. Adrian and Brunnermeier (2011) Macro state variables CFR CBSH SBNY WFC JPM BAC C 2009−06−12 ZION USB Depositories BOKF PBCT PNC COF Insurers HCBK BK Broker−Dealers HBAN STT Others TENET CMA KEY RF FITB STI BBT TAXI NICK AXP BEN CBG NTRS MTB BRO HCC AIG MET TRV SFE ATAX IVZ JLL MKL AJG AFL PRU AVHI AMG TMK CB WHG AGM EV OCN FNF WRB MMC ALL NEWS LM UNM AON ECPG WRLD FII CACC CINF Y PGR L NNI JNS PRAA AB OPY CLMS GS BLK MS LNC CNA PFG HIG GFIG LTS CME SCHW INTL TROW ITG PJC RJF AMTD BGCP SEIC DLLR WETF WDR NDAQ EEFT MKTX GBL SF
Motivation 1-5 CoVaR as a Systemic Risk Measure Step 2. Generate predicted values under assumption F − 1 ε i , t ( τ | M t − 1 ) = 0 and F − 1 ε j | i , t ( τ | M t − 1 , X i , t ) = 0, τ = ( 0 , 1 ) , τ � VaR i , t = ˆ α i + ˆ γ i M t − 1 , τ τ β j | i � � γ j | i M t − 1 + ˆ CoVaR j | i , t = ˆ α j | i + ˆ VaR i , t . Adrian and Brunnermeier (2011) CFR CBSH SBNY WFC JPM BAC C 2009−06−12 ZION USB Depositories BOKF PBCT PNC COF Insurers HCBK BK Broker−Dealers HBAN STT Others TENET CMA KEY RF FITB STI BBT TAXI NICK AXP BEN CBG NTRS MTB BRO HCC AIG MET TRV SFE ATAX IVZ JLL MKL AJG AFL PRU AVHI AMG TMK CB WHG AGM EV OCN FNF WRB MMC ALL NEWS LM UNM AON ECPG WRLD FII CACC CINF Y PGR L NNI JNS PRAA AB OPY CLMS GS BLK MS LNC CNA PFG HIG GFIG LTS CME SCHW INTL TROW ITG PJC AMTD RJF BGCP SEIC DLLR WETF WDR NDAQ EEFT MKTX GBL SF
Motivation 1-6 Elements of Systemic Risk ⊡ Network Effects ⊡ Single Institution’s Contribution to Systemic Risk ⊡ Single Institution’s Exposure to Systemic Risk CFR CBSH SBNY WFC JPM BAC C 2009−06−12 ZION USB Depositories PBCT BOKF COF PNC Insurers HCBK BK Broker−Dealers HBAN STT Others TENET CMA KEY RF FITB STI BBT TAXI NICK AXP BEN CBG NTRS MTB BRO HCC AIG MET TRV SFE ATAX IVZ JLL MKL AJG AFL PRU AVHI AMG TMK CB WHG AGM OCN EV FNF WRB ALL MMC NEWS LM UNM AON ECPG WRLD FII CACC Y CINF PGR L NNI JNS PRAA AB OPY CLMS GS BLK MS LNC CNA PFG HIG GFIG LTS CME SCHW INTL TROW ITG PJC RJF AMTD BGCP SEIC DLLR WETF WDR NDAQ EEFT MKTX GBL SF
Motivation 1-7 Challenges ⊡ Linear tail behavior ◮ Adrian and Brunnermeier (2011) ◮ Acharya et al. (2012) ◮ Brownlees and Engle (2012) ⊡ Linear tail behavior in high dimensions Hautsch, Schaumburg, and Schienle (2014) ◮ ⊡ Non-linear tail behavior in ultra-high dimensions ◮ Method by Fan, Härdle, Wang, and Zhu (2014) CFR CBSH SBNY WFC JPM BAC C 2009−06−12 ZION USB Depositories BOKF PBCT COF PNC Insurers HCBK BK Broker−Dealers HBAN STT Others TENET CMA KEY RF FITB STI BBT TAXI NICK AXP BEN CBG NTRS MTB BRO HCC AIG MET TRV SFE ATAX IVZ JLL MKL AJG AFL PRU AVHI AMG TMK CB WHG AGM EV OCN FNF WRB ALL MMC NEWS LM UNM AON ECPG WRLD FII CACC Y CINF PGR L NNI JNS PRAA AB OPY CLMS GS BLK MS LNC CNA PFG HIG GFIG LTS CME SCHW INTL TROW ITG PJC RJF AMTD BGCP SEIC DLLR WETF WDR NDAQ EEFT MKTX GBL SF
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