Can the Christoffersen Test Strengthen Financial Stability?
(2025) NEKN02 20251Department of Economics
- Abstract (Swedish)
- This thesis investigates whether incorporating the Christoffersen independence
test into regulatory backtesting frameworks can enhance financial stability by improving the detection of systemic risk. Using daily Value-at-Risk and profit-and-loss data from 13 major international banks over 2018–2022, the study distinguishes between clustered and isolated VaR exceptions, applying event studies and panel
regressions with market and bank-level controls. The results show that while both
clustered and isolated exceptions are associated with increased abnormal volatility, only isolated events remain statistically significant for bank-level volatility after accounting for time effects. However, clustered exceptions have a substantial and robust... (More) - This thesis investigates whether incorporating the Christoffersen independence
test into regulatory backtesting frameworks can enhance financial stability by improving the detection of systemic risk. Using daily Value-at-Risk and profit-and-loss data from 13 major international banks over 2018–2022, the study distinguishes between clustered and isolated VaR exceptions, applying event studies and panel
regressions with market and bank-level controls. The results show that while both
clustered and isolated exceptions are associated with increased abnormal volatility, only isolated events remain statistically significant for bank-level volatility after accounting for time effects. However, clustered exceptions have a substantial and robust impact on market-wide volatility (VIX), and Granger causality tests reveal that clusters precede spikes in systemic risk. The evidence suggests that the Christoffersen test provides valuable warning signals for market instability, which the current Basel traffic light approach may overlook. The findings support policy recommendations to supplement or revise regulatory backtesting regimes by incorporating independence testing, thereby strengthening the resilience of the financial system during periods of stress. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/9193571
- author
- Zukauskas, Tadas LU
- supervisor
- organization
- course
- NEKN02 20251
- year
- 2025
- type
- H1 - Master's Degree (One Year)
- subject
- keywords
- Value-at-Risk, Christoffersen Test, Financial Stability, Exception Clustering, Risk Regulation
- language
- English
- id
- 9193571
- date added to LUP
- 2025-09-12 10:47:19
- date last changed
- 2025-09-12 10:47:19
@misc{9193571, abstract = {{This thesis investigates whether incorporating the Christoffersen independence test into regulatory backtesting frameworks can enhance financial stability by improving the detection of systemic risk. Using daily Value-at-Risk and profit-and-loss data from 13 major international banks over 2018–2022, the study distinguishes between clustered and isolated VaR exceptions, applying event studies and panel regressions with market and bank-level controls. The results show that while both clustered and isolated exceptions are associated with increased abnormal volatility, only isolated events remain statistically significant for bank-level volatility after accounting for time effects. However, clustered exceptions have a substantial and robust impact on market-wide volatility (VIX), and Granger causality tests reveal that clusters precede spikes in systemic risk. The evidence suggests that the Christoffersen test provides valuable warning signals for market instability, which the current Basel traffic light approach may overlook. The findings support policy recommendations to supplement or revise regulatory backtesting regimes by incorporating independence testing, thereby strengthening the resilience of the financial system during periods of stress.}}, author = {{Zukauskas, Tadas}}, language = {{eng}}, note = {{Student Paper}}, title = {{Can the Christoffersen Test Strengthen Financial Stability?}}, year = {{2025}}, }