Abstract
Regulators’ stress tests on banks further stimulated an academic debate over systemic risk measures and their predictive content. Focusing on marked based measures, Acharya et al. (Rev Financ Stud 30(1):2–47, 2017) provide a theoretical background to use marginal expected shortfall (MES) for predicting the stress test results, and verify it on the 2009 Supervisory Capital Assessment Program of the US banking system. The aim of this paper is to further test the goodness of MES as a predictive measure, by analysing it in relation to the results of the 2014 European stress tests exercise conducted by the European Banking Authority. Our results underscore the importance of choosing the appropriate index to capture the systemic distress event. In fact MES based on a global market index does not show association with the stress test results, in contrast to Financial MES, which is based on a financial market index, and has a significant information and predictive power.
Highlights
The recent financial crisis highlighted the importance of interconnections in the financial system and the need to measure the impact of contagion
In this paper we analyse the relation between systemic risk measures based on market data and stress test, and we propose and empirical assessment based on the October 2014 European Banking Authority (EBA) stress test of the European banking system
The regression analyses for Marginal Expected Shortfall (MES) and F-MES The main question we want to answer in this work is: does MES or F-MES predict the results from the stress tests? To do this end we use regression analyses and we evaluate the informative content of these measures with respect to two outcomes from the stress tests: the capital shortfall and the total loss
Summary
The recent financial crisis highlighted the importance of interconnections in the financial system and the need to measure the impact of contagion. Focusing on banklevel measures based on stock market data, the most common metrics for systemic risk are CoVaR introduced by Adrian and Brunnermeier (2011) and Marginal Expected Shortfall (MES) proposed by Acharya et al (2010). These measures stem from an extension of traditional risk measures, namely Value at Risk (VaR) and Expected Shortfall (ES), which accounts for contagion effects between the single bank and the whole financial system.
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