Systemic risk of China’s commercial banks during financial turmoils in 2010-2020: A MIDAS-QR based CoVaR approach

ABSTRACT

To evaluate the systemic risk of China’s commercial banks during financial turmoils in 2010–2020, we develop a MIDAS-QR-CoVaR approach. It can exploit rich information contained in high-frequency data and helps to pick up tail risk accurately and timely. The empirical results demonstrate the superiority of MIDAS-QR-CoVaR, which has smaller failure times and average errors than the commonly used DCC-GARCH-CoVaR and QR-CoVaR approaches. Moreover, we observe elevated systemic risk during the financial turmoils. Notably, there is a sharp increase corresponding to the outbreak of COVID-19 pandemic. While some signs of recovery can be observed at the end of sample, which proves the effectiveness of the Chinese governments response. In addition, the results highlight the importance of macroeconomic factors and bank-specific characteristics in determining systemic risk. These provide regulators with useful insights and guidelines for systemic risk management.

KEYWORDS:

• systemic risk
• commercial banks
• financial turmoils
• CoVaR
• MIDAS-QR

Acknowledgements

The authors would like to thank the Editor-in-Chief, the Associate Editor, and the anonymous referee for their helpful comments and constructive guidance. The authors also gratefully acknowledge financial support from the National Natural Science Foundation of China (71671056, 91846201), the Humanity and Social Science Foundation of Ministry of Education of China (19YJA790035) and the National Statistical Science Research Projects of China (2019LD05).

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

This work was supported by the National Statistical Science Research Projects of China [2019LD05]; National Natural Science Foundation of China [71671056,91846201]; Humanity and Social Science Foundation of Ministry of Education of China [19YJA790035].