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Assessing the Systemic Risk in the Financial System of Iran using Granger Causality Network Method

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Abstract

Systemic risk occurs when failure or crisis in a particular segment of a market propagates to other segments and develops into a pervasive crisis so that the loss incurred by one or more influential major institutions spreads to others. The precise and timely identification of systemic risk is an indispensable necessity in each country's financial system to prevent a financial crisis. In this regard, this study seeks to evaluate the systemic risk in Iran's financial system. including banks, investment, and insurance companies between 2011 and 2017 using the Granger Causality Network method.

According to the results of this study, the banking and insurance sectors have the highest and lowest systemic risks, respectively. In addition, the results showed that the systemic relationship between financial institutions changes over time. Finally, the Rank regression was used to validate the results of the research and it was found that the extracted results enjoy adequate validity. The results showed that, among the three sectors, the banking sector imposed the largest impact on others indicating a high level of systemic risk in this sector. In other words, as a part of the financial system of the country, the banking system is of higher systemic importance than the other sectors, so a possible crisis in this sector may easily spread to other sectors given its relatively large influence on other sectors.

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