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Monitoring indirect contagion

Author

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  • Cont, Rama
  • Schaanning, Eric

Abstract

We propose two indicators for quantifying the potential exposure of financial institutions to indirect contagion arising from deleveraging of assets in stress scenarios. The first indicator, the Endogenous Risk Index (ERI) captures spillovers across portfolios arising from deleveraging in stress scenarios. The second indicator, the Indirect Contagion Index (ICI) measures the systemic importance of a bank by quantifying the loss its distressed liquidation would inflict on other institutions. Both are computable from portfolio holdings of financial institutions and measures of market depth for the assets held in the portfolio. We discuss the micro-foundation of these indicators and apply them to the analysis of the vulnerability of the European banking system to indirect contagion.

Suggested Citation

  • Cont, Rama & Schaanning, Eric, 2019. "Monitoring indirect contagion," Journal of Banking & Finance, Elsevier, vol. 104(C), pages 85-102.
    • Handle: RePEc:eee:jbfina:v:104:y:2019:i:c:p:85-102
    DOI: 10.1016/j.jbankfin.2019.04.007
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    More about this item

    Keywords

    Financial stability; Price-mediated contagion; Macro prudential regulation; Systemic risk measurement;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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