Modeling Financial Crises and Sovereign Risks
AbstractThe complex interactions, spillovers, and feedbacks of the global crisis that began in 2007 remind us of how important it is to improve our analysis and modeling of financial crises and sovereign risk. This review provides a broad framework to examine how vulnerabilities can build up and suddenly erupt in a financial crisis, with potentially disastrous feedback effects for sovereign debt and economic growth. Traditional macroeconomic analyses overlook the importance of risk, which makes them ill-suited to examine interconnectedness, risk transmission mechanisms, and contagion. After presenting an overview of the key features of the global 2007-2009 crisis, this review discusses new directions for research on modeling financial crises and sovereign risk, including the need for integrating risk into macroeconomic policy models and enhancing early warning system and financial contagion models through a more comprehensive view of economy-wide risks. Also, new tools to mitigate and control macro risk need to be developed, along with new approaches to regulate financial sector risk-taking and monitor and manage the interactions between private sector and sovereign risk.
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Bibliographic InfoArticle provided by Annual Reviews in its journal Annual Review of Financial Economics.
Volume (Year): 1 (2009)
Issue (Month): 1 (November)
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Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- G01 - Financial Economics - - General - - - Financial Crises
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- Monica Billio & Mila Getmansky & Andrew W. Lo & Loriana Pelizzon, 2011.
"Econometric Measures of Connectedness and Systemic Risk in the Finance and Insurance Sectors,"
2011_21, Department of Economics, University of Venice "Ca' Foscari".
- Billio, Monica & Getmansky, Mila & Lo, Andrew W. & Pelizzon, Loriana, 2012. "Econometric measures of connectedness and systemic risk in the finance and insurance sectors," Journal of Financial Economics, Elsevier, vol. 104(3), pages 535-559.
- Alter, Adrian & Schüler, Yves S., 2012. "Credit spread interdependencies of European states and banks during the financial crisis," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3444-3468.
- Adrian Alter & Yves Stephan Schüler, 2011. "Credit Spead Interdependencies of European States and Banks during the Financial Crisis," Working Paper Series of the Department of Economics, University of Konstanz 2011-24, Department of Economics, University of Konstanz.
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