CVaR in G-VAR : Financial Markets Vulnerabilities and Left-Tail Risk Spillovers

Abstract: This paper proposes an empirical framework to assess the ad-hoc tail risk connectedness across financial markets. I discuss the role of systemic risk as a predictor of financial tail risks in the quantile regression framework introduced in Adrian et al. (2019). I independently estimate the expected shortfall, also called conditional value-at-risk (CVaR), for four asset classes. Surprisingly, systemic stress has little informational power over future tail outcomes in those asset classes, even if the overall picture is not homogeneous across markets. The CVaR measures constructed as the tails of predictive conditional distributions are then taken to a generalized vector autoregression (G-VAR) framework in which forecast-error variance decompositions are invariant to the variable ordering as in Diebold & Yilmaz (2012) to build a directional left-tail risk spillovers measure. I find strong evidence of high dependence between the tails of the distributions across financial markets with risks of contagion during episodes of high volatility.

Presented at: The 6th QFFE (Quantitative Finance and Financial Econometrics) International Conference 2024 - at AMSE (Aix-Marseille School of Economics) 

[Working Paper] - [Data & Replication Codes]

Granular Bank Shocks and Financial Intermediation in a Low-Income Economy (with F. Fischer & O. Ozlu)

Abstract: This paper studies how granular bank shocks propagate to aggregate credit in Mauritania’s banking system. Using confidential monthly data, we extract size-weighted innovations to lending growth and profitability. At the aggregate level, lending shocks are large and exhibit a near one-for-one mapping into monthly credit growth, accounting for roughly 80% of its short-run fluctuations. By contrast, profitability shocks are small, statistically insignificant, and contribute almost nothing to explaining aggregate credit. This pattern suggests that fluctuations in intermediation are driven by shifts in lending at a few dominant banks, while high earnings are largely retained as buffers rather than recycled into new credit, revealing a persistent wedge between profitability and the provision of financial services. The

results have direct policy relevance for Mauritania and, more broadly, for emerging and low-income economies with concentrated and nascent banking sectors.

Presented at: International Monetary Fund (IMF) Brown Bag Presentation

[Working Paper (upon request)]