Dynamic CoVaR Modeling and Estimation

Understand

The popular systemic risk measure CoVaR (conditional Value-at-Risk) and its variants are widely used in economics and finance.

• In this article, we propose joint dynamic forecasting models for the Value-at-Risk (VaR) and CoVaR.
• The CoVaR version we consider is defined as a large quantile of one variable (e.g., losses in the financial system) conditional on some other variable (e.g., losses in a bank's shares) being in distress.
• We introduce a two-step M-estimator for the model parameters drawing on recently proposed bivariate scoring functions for the pair (VaR, CoVaR).