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Systemic Risk for Financial Institutions in the Major Petroleum-based Economies: The Role of Oil

We examine the relationship between oil returns and systemic risk of financial institutions in major petroleum-based economies. By estimating ΔCoVaR, we observe the presence of remarkable increases in risk levels during the financial crises and achieve a better risk measurement when oil returns are included in the risk functions. Moreover, the estimated spread between the CoVaR without and with oil returns is absorbed in a time range that is longer than the duration of the oil shocks. This indicates that drops in oil prices which have a longer effect on risk and financial institutions require more time to account for their impact. Policy implications are also provided.

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Keywords: Systemic risk, ΔCoVaR, financial institutions, petroleum-based economies

DOI: 10.5547/01956574.42.6.akha

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Published in Volume 42, Number 6 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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