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Dynamic modeling of marginal expected shortfall under economic sensitivity: empirical evidence from Pakistan

Hasan Hanif (Department of Management Studies, Air University Islamabad, Islamabad, Pakistan)

South Asian Journal of Business Studies

ISSN: 2398-628X

Article publication date: 13 February 2023




Systemic risk is of concern for economic welfare as it can lower the credit supply to all the sectors within an economy. This study examines for the first time the complete hierarchy of variables that drive systemic risk during normal and crisis periods in Pakistan, a developing economy.


Secondary data of the bank, sector and country variables are used for the purpose of the analysis spanning from 2000 to 2020. Systemic risk is computed using marginal expected shortfall (MES). One-step and two-step system GMM is performed to estimate the impact of firm, sector and country-level variables on systemic risk.


The findings of the study highlight that sector-level variables are also highly significant in explaining the systemic risk dynamics along with bank and country-level variables. In addition, economic sensitivity influences the significance level of variables across crisis and post-crisis periods and modifies the direction of relationships in some instances.

Research limitations/implications

The study examines the systemic risk of a developing economy, and findings may not be generalizable to developed economies.

Practical implications

The outcome of the study provides a comprehensive framework for the central bank and other regulatory authorities that can be translated into timely policies to avoid systemic financial crisis.

Social implications

The negative externalities generated by systemic risk also affect the general public. The study results can be used to avoid the systemic financial crisis and resultantly save the loss of the general public's hard-earned holdings.


The firm, sector and country-level variables are modeled for the first time to estimate systemic risk across different economic conditions in a developing economy, Pakistan. The study can also act as a reference for researchers in developed economies as well regarding the role of sector-level variables in explaining systemic risk.



Hanif, H. (2023), "Dynamic modeling of marginal expected shortfall under economic sensitivity: empirical evidence from Pakistan", South Asian Journal of Business Studies, Vol. ahead-of-print No. ahead-of-print.



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