Systemic Risk Dynamics in the Dutch Economy: a ∆CoVaR approach

Abstract

This paper studies the degree of systemic risk contributions in the financial and non-financial sector in the Dutch economy. We apply the three-step approach of Girardi and Ergün (2013) to estimate the ∆CoVaR. Using daily data, systemic risk contributions are computed for eight sectors for the sample period January 2006 - December 2015. This paper investigates the determinants of systemic risk contributions, or the ∆CoVaR. Besides the usual determinants suggested by theory, also the link between international trade, which serves as a proxy for globalization, and systemic risk is investigated. We selected the Dutch economy since some of the world’s leading multinationals are headquartered in the Netherlands. It is precisely these multinationals that are responsible for the lion’s share of international trade in goods. Subsamples are used to investigate the systemic risk dynamics during the business cycle, with a focus on the financial crisis of 2008-2009. Further, sectorspecific systemic risk is examined. The empirical analysis of the ∆CoVaR and the panel analysis show an observable effect of the financial crisis, indicating that the Dutch economy remains systemically riskier compared to the pre-crisis period. Next, our research reveals that systemic risk contributions are not limited to the financial sector, but also affect the real economy. The panel data analysis indicates that the ∆CoVaR is sector-specific, and that the VaR is an important determinant of systemic risk. The latter is not a surprising result, since the VaR is essential for calculating the ∆CoVaR. Finally, this paper focuses on the effect of globalization on systemic risk. We find evidence suggesting that globalization, or international trade as its proxy, lowers the ∆CoVaR or systemic risk contributions. However, its effect is diluted because there are other determinants such as VaR, and Size and Sector, which influence systemic risk more clearly. As a result, we were unable to find sufficient evidence to identify globalization as an irrefutable significant determinant of systemic risk.