Investigating the Financial Risk Spillover in Banks Accepted in Tehran Stock Exchange Market through MGARCH Approach

Considering the remarkable role of the banking industry in the economies, determining the financial risks and the spillover mechanism between banks is of particular importance. The goal of this research is to study the spillover of financial risks such as credit, liquidity, and market risks in the banks accepted in the Tehran Stock Exchange (TSE) and the Over-The-Counter stock market of Iran.

To evaluate market risk changes in the conditional value at risk  criterion is used. Moreover, liquidity risk and credit risk are examined using changes in Liquidity value at risk  and Value at risk of distance to default, respectively. The data was collected from 15 banks accepted in Tehran Stock Exchange daily basis between 2009 and 2018. In addition, in order to study the mechanism for the spillover of risks, GARCH-DCC Model was employed, too.

In the model, all indices have a meaningful difference from zero at the 5% level, and the estimated variance equation signifies spillover among banks. GARCH index for the model shows that liquidity risk is higher compared to credit and market risks. Moreover, there is no stable correlation among the risks investigated, and they have a DCC (1,1) process, i.e., the correlation among the variables is a function of the past values of the variable, itself, as well as the shock inflicted from other variables and banks with positive open exchange status (that their exchange assets are more than exchange liabilities) have lower market risks compared to the banks with negative open exchange status.

The results show that there are market, liquidity, and credit risks spillover among banks, and the banks with low liquidity are more likely to be at the risk of liquidity spillover. Besides, banks with overdue debts play a more prominent role in the credit risk spillover. . Bank with a positive open foreign exchange position (banks with more foreign exchange assets than foreign currency debit) have to lower market risk than banks with a negative foreign exchange position.