Measures of systemic risk and financial fragility in Korea

This paper provides a quantitative metric for financial stability of Korean commercial banking system based on the Tsomocos (J Math Econ 39(5-6): 619-655, 2003) model, for which we use market data as proxies for probabilities of default and equity valuation of the banking sector. We estimate the effect of the probability of default and the equity valuation of the banking sector on real output using a vector error correction model (VECM). In addition, we estimate the contributions of individual banks to systemic risk usingCoVaR andMES(Marginal Expected Shortfall). CoVaR is estimated based on the methodology of Adrian and Brunnermeier (2010), and MES is estimated based on Shapley valuemethodology which has been introduced byTarashev et al. (2010).