SYSTEMIC RISK IN TAIWAN STOCK MARKET

Abstract

Recent financial crises resulted from systemic risk caused by idiosyncratic distress. In this research, taking Taiwan stock market as an example and collecting data from 2000 to 2010 which contained the 2001 dot-corn bubble and the 2007-2009 financial crisis, we adopt the CoVaR model to empirically explore the impact of sector-specific idiosyncratic risk on the systemic risk of the system and attempt to investigate the links between financial crises, systemic risk and the idiosyncratic risk of a sector-specific anomaly. The result showed sector-specific marginal CoVaR, i.e., Delta CoVaR, perfectly explained Taiwan stock market disturbance during the 2001 dot-corn bubble and 2007-2008 financial crisis. Thus, by identifying the larger Delta CoVaR sectors, i.e. the systemic importance sectors, and by exploring the risk indicators, independent variables, of these systemic importance sectors, investors could practically employ the sector-specific Delta CoVaR measure to deepen the systemic risk scrutiny from a macro into a micro prudential perspective.