Systemic Risk in Russian Financial Market

Systemic risk has proved to represent a severe threat to the stability of the financial system during the global crisis of 2008, which provoked active research in this field. The fire sale channel is particularly important in understanding systemic risk, as it illustrates how liquidity pressures and asset sales can lead to widespread financial instability. I quantify the fire-sale systemic risk metric called ‘Aggregate Vulnerability’ to extend the scope of the systemic risk study in Russia by providing an approach alternative to stress-testing and network analysis currently employed by the Central Bank of Russia to mitigate this type of risk. I evaluate the validity of this metric on the Russian financial market data from 2014Q1 to 2022Q1 and assess its prediction power. The findings present evidence of index’s high responsiveness to temporary shocks and external events that could potentially foster the build-up of vulnerabilities. The index's reliance on adjustment speed and illiquidity concentration as key parameters proves essential in capturing these dynamics and differentiates AV from other systemic risk measures. Additionally, the correlation with alternative systemic risk measures reinforces the AV index's applicability in the Russian financial market. However, the absence of systemic risk realizations within the sample period limits the assessment of its predictive capabilities. These results contribute to the existing literature on systemic risk by generalizing the theoretical concept of AV through providing of empirical evidence of its validity on the Russian financial market.