Systemic Risk in Gulf Cooperation Council Countries’ Equity Markets and Banking Sectors: A Dynamic Conditional Value-at-Risk Approach

Abstract

We employ dynamic conditional Value at Risk (CoVaR) technique of Adrian and Brunnermeir (2016) in examining the systemic risk and its spillovers for the Gulf Cooperation Council (GCC) countries during the period of January 2004 to June 2020. To do so, we identify 11 large banks in the region that are systemically important given their size and construct country specific banking indices excluding the systemically important banks (SIBs) listed in that market. We examine the systemic spillovers from SIBs to the broad-based GCC market indices and value-weighted banking indices. Our results show that exclusion of the SIB is crucial in isolating the incremental CoVaR spillovers, otherwise it is simply function of SIB’s conditional VaR. We document that incremental tail spillovers are large just not for the market in which SIB is listed but they also increase the tail risk of other GCC markets. The only country that appear insulated from systemic spillovers is Kuwait, otherwise a systemic shock has the strength and size to increases losses in the GCC market and banking sector that goes unaccounted for using bank-specific VaR.