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Weak & Strong Financial Fragility

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Author Info

  • J.L. Geluk

    ()
    (The Petroleum Institute)

  • L. de Haan

    ()
    (Erasmus Universiteit Rotterdam)

  • C.G. de Vries

    ()
    (Erasmus Universiteit Rotterdam)

Abstract

The 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 Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 07-023/2.

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Date of creation: 14 Feb 2007
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Handle: RePEc:dgr:uvatin:20070023

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Web page: http://www.tinbergen.nl

Related research

Keywords: Systemic Stability; Multivariate Extreme Value Analysis; Asymptotic (In-)dependence;

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Cited by:
  1. Geluk, J.L. & de Vries, C.G., 2004. "Weighted sums of subexponential random variables and asymptotic dependence between returns on reinsurance equities," Econometric Institute Research Papers EI 2004-47, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  2. Michael Falk & Diana Tichy, 2012. "Asymptotic conditional distribution of exceedance counts: fragility index with different margins," Annals of the Institute of Statistical Mathematics, Springer, vol. 64(5), pages 1071-1085, October.
  3. Tomas Fiala & Tomas Havranek, 2014. "Ailing Mothers, Healthy Daughters? Contagion in the Central European Banking Sector," William Davidson Institute Working Papers Series wp1069, William Davidson Institute at the University of Michigan.
  4. 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.
  5. 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.

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