Systemic risk of China’s commercial banks during financial turmoils in 2010-2020: A MIDAS-QR based CoVaR approach

Abstract

To evaluate the systemic risk of China’s commercial banks during financial turmoils in 2010–2020, we develop a MIDAS-QR-CoVaR approach. It can exploit rich information contained in high-frequency data and helps to pick up tail risk accurately and timely. The empirical results demonstrate the superiority of MIDAS-QR-CoVaR, which has smaller failure times and average errors than the commonly used DCC-GARCH-CoVaR and QR-CoVaR approaches. Moreover, we observe elevated systemic risk during the financial turmoils. Notably, there is a sharp increase corresponding to the outbreak of COVID-19 pandemic. While some signs of recovery can be observed at the end of sample, which proves the effectiveness of the Chinese governments response. In addition, the results highlight the importance of macroeconomic factors and bank-specific characteristics in determining systemic risk. These provide regulators with useful insights and guidelines for systemic risk management.