Measuring Network Systemic Risk Contributions: A Leave-one-out Approach

Mercredi | 2018-05-24
Salle B103 – 12h00

Sullivan HUE – Sessi TOKPAVI – Yannick LUCOTTE

Granger-causality measures of interconnectedness between financial institutions are useful indicators of systemic risk (Billio et al., 2012, Journal of Financial Economics), as they help to evaluate to which extent the distress of one institution disseminates across the whole financial system due to the network. This article provides a critical assessment of Granger-causality networks, showing that they can lead to inconsistent measures of systemic risk contributions due to the presence of spurious causalities arising from indirect contagion effects. Traditional solutions to control for these effects – via inference on conditional Granger-causality – lead however to the curse of dimensionality. To solve this issue, we provide a measure of financial network systemic risk contributions based on the leave-one-out (LOO) concept. For a given financial institution, the new measure evaluates to which extent the total number of significant Granger-causality breakdowns when this institution is excluded from the system. We control for spurious causalities between the remaining institutions due to the indirect contagion effect of the excluded financial institution using a conditional Granger-causality test, which is free of the curse of dimensionality. Empirical applications are conducted using daily market returns for a sample of the world?s largest banks. Results show that our measure gives a meaningful ranking of the systemic importance of financial institutions which is consistent with the ranking of global systemically important banks (G-SIBs) provided by the Financial Stability Board (FSB). Moreover, our measure appears as a robust significant early-warning indicator of large losses in the case of a systemic event, and is strongly driven by balance-sheet variables related to size, leverage, profitability and bank?s specialization.