A new approach to measure systemic risk: A bivariate copula model for dependent censored data

Raffaella Calabrese, Silvia Angela Osmetti

Research output: Contribution to journalArticlepeer-review

Abstract

We propose a novel approach based on the Marshall-Olkin (MO) copula to estimate the impact of systematic and idiosyncratic components on cross-border systemic risk. To use the data on non-failed banks in the suggested method, we consider the time to bank failure as a censored variable. Therefore,we propose a pseudo-maximum likelihood estimation procedure for the MO copula for a Type I censored sample. We derive the log-likelihood function, the copula parameter estimator and the bootstrap confidence intervals. Empirical data on the banking system of three European countries (Germany, Italy and the UK) shows that the proposed censored model can accurately estimate the systematic component of cross-border systemic risk.
Original languageEnglish
Pages (from-to)1053-1064
JournalEuropean Journal of Operational Research
Volume279
Issue number3
Early online date19 Jun 2019
DOIs
Publication statusPublished - 16 Dec 2019

Keywords

  • OR in banking
  • copula models
  • pseudo-maximum likelihood estimation
  • censored sampling
  • systemic risk

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