Change in Systemic Risk in Indian Financial Market due to COVID-19 Pandemic

Abstract

This paper used an economic model of systemic risk given by Acharya (2016) to measure the state of systemic risk in Indian financial market during COVID-19 Pandemic. It is based on marginal expected shortfall (MES), the likelihoods of a financial firm to be undercapitalized when the financial system as a whole is undercapitalized. The paper empirically measures the MES of financial firms of NIFTY 50 for pre-COVID year 2019-20 and COVID year2020-21 and found that the undercapitalization of Indian financial firm has increased 3 fold during COVID-19 Pandemic ensuing systemic risk has been increased during COVID-19 year to pre-COVID year. The result is also supported by daily stock return correlations of financial firms which is a simple and robust indicator of systemic risk. It has been found that the correlations of financial firm stock returns among themselves and market index as well is increased during COVID-19 pandemic that led to rise in systemic risk. Higher correlations among financial firms are a prerequisite for systemic failure.