Dynamic CoVaR

Its conceptual appeal has made the Conditional Value at Risk (CoVaR) one of the most influential systemic risk indicators. Despite its popularity, an outstanding methodological challenge may hamper the CoVaRs’ accuracy in measuring the time-series dimension of systemic risk. The dynamics of the CoVaR are entirely due to the behaviour of the state variables and therefore without their inclusion, the CoVaR would be constant over time. The key contribution of this paper is to relax the assumption of time-invariant tail dependence between the financial system and each institution’s losses. We find that the dynamic component that we introduce does not affect the estimations for the risk of individual financial institutions, but it largely affects estimations of systemic risk which exhibits more procyclicality than the one implied by the standard CoVaR.