BOK Working/Discussion Papers

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Measures of Systemic Risk and Financial Fragility in Korea

Economic Research Institute 2012.08.02 4826

This paper provides a quantitative metric for financial stability of Korean banking system based on the Tsomocos (2003a, b) model, for which we use market data as proxies for probabilities of default and equity valuation of the banking sector.  We estimate the effect of the probability of default and the equity valuation of the banking sector on real output in order to measure the financial fragility using a vector error correction model (VECM).  In addition, we estimate the contributions of individual banks to systemic risk using CoVaR and MES (Marginal Expected Shortfall).  CoVaR is estimated based on the methodology of Adrian and Brunnermeier (2010), and MES is estimated based on Shapley value methodology which has been introduced by Tarashev, Borio and Tsatsaronis. (2010).