Khalifa, Ahmed Caporin, Massimiliano Costola, Michele Hammoudeh, Shawkat
Year of Publication:
SAFE Working Paper Series 172
This paper examines the relationship between systemic risk measures across 546 financial institutions in major petroleum-based economies and oil movements. In this paper, we follow two steps. In the first step, we estimate the delta conditional VaR (CoVaR) for the financial institutions and verify the interdependence between the systemic risk and oil, both on a graphical basis and by means of statistical tests. Further, we analyse the financial companies' connectedness through Granger causality-based networks, augmented with oil exposures. We observe the presence of elevated increases in the CoVaR levels, corresponding to the subprime and global crises, which are exogenous shocks to the financial institutions located in the GCC countries. In the second step, we consider the CoVaR by introducing oil returns as a state variable to detect if there is an improvement in the systemic risk measurement. The results provide evidence in favour of risk measurement improvements by accounting for oil returns in the risk functions, as monitored by coverage tests.