ESTIMATING A JOINT PROBABILITY OF DEFAULT INDEX FOR INDONESIAN BANKS: A COPULA APPROACH

  • Zaafri Ananto Husodo Universitas Indonesia, Department of Management, Faculty of Economics and Business
  • Sigit Sulistyo Wibowo Universitas Indonesia, Department of Management, Faculty of Economics and Business
  • Muhammad Budi Prasetyo Universitas Indonesia, Department of Management, Faculty of Economics and Business
  • Usman Arief
  • Maulana Harris Muhajir Bank Indonesia, Department of Macroprudential Policy
Keywords: Copula, Pair copula construction, Systemic risk, Financial system

Abstract

We develop a joint default probability index to signal potential systemic risks in the highly concentrated Indonesian banking industry. To build the index, we estimate bank-level tail risks using monthly bank financial reports. We use the copula approach to derive the joint multivariate dependencies at the bank level, as reflected in the monthly financial reports. Our results, which are based on a sample of 104 banks fromDecember 2003 to April 2020, show joint multivariate dependencies at the bank level suggesting that the standard univariate normal distribution is unsuitable for capturing tail risks of individual banks. Our index accurately captures the global financial crisis of 2007-2008 indicating that it is a valid joint default probability index. Further, our index also signaled a higher degree of joint default before the COVID-19 outbreak in2020, suggesting that it is a good indicator of potential systemic risk in the economy.

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Published
2020-10-31
How to Cite
Husodo, Z., Wibowo, S., Prasetyo, M., Arief, U., & Muhajir, M. (2020). ESTIMATING A JOINT PROBABILITY OF DEFAULT INDEX FOR INDONESIAN BANKS: A COPULA APPROACH. Buletin Ekonomi Moneter Dan Perbankan, 23(3), 389 - 412. https://doi.org/10.21098/bemp.v23i3.1358
Section
Articles