Abstract
In this paper we use the conditional Value at Risk (CoVaR) and CoVaR variation (ΔCoVaR) proposed by Adrian and Brunnermeier (2008, 2011, 2016) to estimate the Peruvian stock market risk (through the IGBVL) conditioned on the international financial market (given that the S&P500) and conditioned on three of the main commodities exported by Peru: copper, silver and gold. Moreover, the CoVaR measures are compared with the VaR of the IGBVL to understand the differences using conditional and unconditional risk measure estimators. The results show that both CoVaR and ΔCoVaR are useful indicators to measure the Peruvian stock market risk.
Highlights
In times of financial crisis, the losses of financial institutions in distress tend to spread to the rest of the financial system
The main objective of this study is to critically evaluate the conditional Value at Risk (CoVaR) method in terms of the estimation of Peruvian stock market risk, recording the advantages and disadvantages compared to traditional risk measures such as the Value at Risk (VaR)
We propose a methodology based on the concepts of CoVaR and delta CoVaR from Adrian and Brunnermeier (2008)
Summary
In times of financial crisis, the losses of financial institutions in distress tend to spread to the rest of the financial system. Traditional risk measures such as the (unconditional) Value at Risk (VaR) have been used to estimate the individual risk of each entity, but without explicitly considering the co-dependency that may exist in relation to the risk of other entities and other markets This limitation of unconditional VaR methods has become extremely important in the light of the financial crisis of the late 2000s. A growing consensus has emerged among policy makers, risk managers and academic researchers about the importance of adopting different approaches to measure risk and mitigate the risks inherent to the financial system as a whole For this reason, systemic risk and its management have become a key regulatory issue. Measures to mitigate this risk constitute macroprudential regulation, which addresses the financial system as a whole, giving priority to the interrelationships between its components and resultant effects on the rest of the economy (Gauthier et al, 2010)
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