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Lesson 2 (ctross-ssection) style

  • Definition: CoVaR = VaR of index conditional on

that other firm is in distress, i.e. at its VaR level.

q C o V a ij R

| i q q V a R V a j R

ˆ

ij q

ˆ

ij q

VaR j

  • E.g. use quantile regressions

q

arg min

t

  • Compared to OLS

q yt 1 q yt

OLS

arg min

t

xt xt

yt

if yt if yt

xt

2

xt

0

xt

0

16

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