A Framework for Measuring and Predicting Systemic Risk with the Marginal Expected Shortfall Approach (MES) in Iran Capital Market

Abstract

In this research, it is attempted to present a framework for estimating and predicting systemic risk in Iran capital market using the marginal expected shortfall approach (MES), which has recently been considered in systemic risk literature. On this basis, MES as a systemic risk measure, will be analyzed in terms of assumptions for market and firm returns as a function of mean, volatility, correlation, and tail expectations and its components will be measured using an ARMA-GJR-GARCH-DCC framework and a nonparametric tail expectation estimator. In this way, a weekly panel will be created from the company's MES. On the other hand, the systemic risk is built up in a period that looks calm and low fluctuations, and is accumulated until activation. In other words, systemic risk potential increases as fluctuations decrease. In this study, it was attempted to predict systemic risk by taking advantage of the panel structure of the data and the relationship between MES and firm-specific variables that are available in certain sections.

Keywords

• Systemic risk
• systemic risk measurement
• prediction of systemic risk
• marginal expected shortfall (MES)
• risk contagion
• dynamic conditional correlation (DCC)