Estimate Of The Systemic Risk Of China’s Securities Industry Through CoVaR Method

The global financial crisis triggered by the subprime crisis in America caused the rapid spread of systemic risk all around the world. Many countries’economic and financial development has been hit hard, drawing attention to the warning and prevention of systemic risk among financial institutions and supervision authorities. Though the crisis is near its end, the effects are far from over and it will be a perpetual theme of financial industry to measure and prevent systemic risk.Based on previous theoretical and empirical studies, this paper gives a detailed introduction to the systemic risk measuring method, CoVaR and its application in our study. This paper focuses on China’s securities industry and measures its systemic risk based on11listed security companies in China. We use quantile regression method to calculate the VaR and CoVaR of different security companies and the industry. Through further calculation, we obtain the risk spillover effects among these companies and the industry, and these effects are quantified so it’s easy to make analysis and comparison among different companies.Our empirical study shows that the risk levels of different firms and the industry may be underestimated through VaR method, especially when there is extreme event. On the other hand, CoVaR can capture the risk spillover effects from firms to the industry or the industry to the firms when either side is in distress, thus it is a more comprehensive and efficient way to measure and monitor risk. We also find that the risk spillover effect of a firm to others doesn’t necessarily relate to its scale or status in the industry. Actually, firms with lower unconditional VaR tend to have smaller risk spillover effect on the industry but they get affected more when the industry is in distress. We must point out that our results through CoVaR method only show the degree to which a firm is affected by the industry’s or other firms’ risk conditions, it says nothing about the firms influence or status in the industry and the two facts are not contradictory. Based on these findings, the paper proposed some policy recommendations for the risk management of security firms and risk supervision of the regulators.