Abstract
We are looking for tools to identify, model, and measure systemic risk in the insurance sector. To this aim, we investigated the possibilities of using the Dynamic Time Warping (DTW) algorithm in two ways. The first way of using DTW is to assess the suitability of the Minimum Spanning Trees’ (MST) topological indicators, which were constructed based on the tail dependence coefficients determined by the copula-DCC-GARCH model in order to establish the links between insurance companies in the context of potential shock contagion. The second way consists of using the DTW algorithm to group institutions by the similarity of their contribution to systemic risk, as expressed by DeltaCoVaR, in the periods distinguished. For the crises and the normal states identified during the period 2005–2019 in Europe, we analyzed the similarity of the time series of the topological indicators of MST, constructed for 38 European insurance institutions. The results obtained confirm the effectiveness of MST topological indicators for systemic risk identification and the evaluation of indirect links between insurance institutions.
Highlights
The European Insurance and Occupational Pensions Authority (EIOPA) [1] acts as an independent advisor to the European Parliament
For the crises and the normal states identified during the period 2005–2019 in Europe, we analyzed the similarity of the time series of the topological indicators of Minimum Spanning Trees (MST), constructed for 38 European insurance institutions
The analysis shows that during crises, MSTs shrink, as evidenced by the decreasing Average Path Length (APL) and Diameter and the growing Max.Deg, which is favorable to the potential spread of undesirable effects of the shocks on the insurance market
Summary
The European Insurance and Occupational Pensions Authority (EIOPA) [1] acts as an independent advisor to the European Parliament. In a document from 2017, it noted that the dynamics of mutual connections in the insurance sector has significant importance. We used the Dynamic Time Warping (DTW) algorithm in two ways to evaluate the suitability of Minimum Spanning Trees’ topological indicators in the context of systemic risk (SR) and to construct the MST, to establish the similarity between the time series of the DeltaCoVaR measure. We analyzed the dynamics of indirect connections between insurance companies that result from market price channels. Interlinkages between insurers and their dynamics have a direct impact on systemic risk contagion in the insurance sector. We proposed as in [2] “a hybrid approach to the analysis of interlinkages dynamics based on combining the copula-DCC-GARCH model and Minimum Spanning Trees (MST).”
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