Estimating the CoVaR for Korean Banking Industry

The concept of CoVaR introduced by Adrian and Brunnermeier (2009) is a useful tool to measure the risk spillover effect. It can capture the risk contribution of each institution to overall systemic risk. While Adrian and Brunnermeier rely on the quantile regression method in the estimation of CoVaR, we propose a new estimation method using parametric distribution functions such as bivariate normal and SU-normal distribution functions. Based on our estimates of CoVaR for Korean banking industry, we investigate the practical usefulness of CoVaR for a systemic risk measure, and compare the estimation performance of each model. Empirical results show that bank makes a positive contribution to system risk. We also find that quantile regression and normal distribution models tend to considerably underestimate the CoVaR (in absolute value) compared to SU-normal distribution model, and this underestimation becomes serious when the crisis in a financial system is assumed.