Weak & Strong Financial Fragility
AbstractThe stability of the financial system at higher loss levels is either characterized by asymptotic dependence or asymptotic independence. If asymptotically independent, the dependency, when present, eventually dies out completely at the more extreme quantiles, as in case of the multivariate normal distribution. Given that financial service firms' equity returns depend linearly on the risk drivers, we show that the marginals' distributions maximum domain of attraction determines the type of systemic (in-)stability. A scale for the amount of dependency at high loss lovels is designed. This permits a characterization of systemic risk inherent to different financial network structures. The theory also suggests the functional form of the economically relevant limit copulas.
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 07-023/2.
Date of creation: 14 Feb 2007
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Systemic Stability; Multivariate Extreme Value Analysis; Asymptotic (In-)dependence;
Find related papers by JEL classification:
- C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
- G20 - Financial Economics - - Financial Institutions and Services - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-05-26 (All new papers)
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- Zhengjun Zhang, 2009. "On approximating max-stable processes and constructing extremal copula functions," Statistical Inference for Stochastic Processes, Springer, vol. 12(1), pages 89-114, February.
- Herrera, R. & Eichler, S., 2011. "Extreme dependence with asymmetric thresholds: Evidence for the European Monetary Union," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 2916-2930, November.
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