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Systemic Risk Diagnostics

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Author Info

  • Bernd Schwaab

    ()
    (VU University Amsterdam, and European Central Bank)

  • Andre Lucas

    ()
    (VU University Amsterdam)

  • Siem Jan Koopman

    ()
    (VU University Amsterdam)

Abstract

A macro-prudential policy maker can manage risks to financial stability only if currentand future risks can be reliably assessed. We propose a novel framework to assessfinancial system risk. Using a dynamic factor framework based on state-space methods, we model latent macro-financial and credit risk components for a large data setcomprising the U.S., the EU-27 area, and the rest of the world. Controlling for global,region-specific, and industry effects, we construct coincident measures ('thermometers')and forward looking indicators of financial distress and the likelihood of financial melt-down. We find that credit risk conditions can significantly and persistently de-couplefrom macro-financial fundamentals. Such decoupling can serve as an early warningsignal for macro-prudential policy.

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File URL: http://papers.tinbergen.nl/10104.pdf
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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 10-104/2/DSF 2.

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Date of creation: 18 Oct 2010
Date of revision: 29 Nov 2010
Handle: RePEc:dgr:uvatin:20100104

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

Related research

Keywords: financial crisis; systemic risk; credit portfolio models; frailty-correlated defaults; state space methods;

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Citations

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Cited by:
  1. Hautsch, Nikolaus & Schaumburg, Julia & Schienle, Melanie, 2014. "Forecasting systemic impact in financial networks," International Journal of Forecasting, Elsevier, vol. 30(3), pages 781-794.
  2. Dungey, Mardi & Luciani, Matteo & Veredas, David, 2012. "Ranking systemically important financial institutions," Working Papers 15473, University of Tasmania, School of Economics and Finance, revised 21 Nov 2012.
  3. Xisong Jin & Francisco Nadal De Simone, 2013. "Banking Systemic Vulnerabilities: A Tail-risk Dynamic CIMDO Approach," BCL working papers 82, Central Bank of Luxembourg.
  4. Nikolaus Hautsch & Julia Schaumburg & Melanie Schienle, 2011. "Financial Network Systemic Risk Contributions," SFB 649 Discussion Papers SFB649DP2011-072, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  5. Peter Claeys & Borek Vašícek, 2013. "“How systemic is Spain for Europe?”," AQR Working Papers 201301, University of Barcelona, Regional Quantitative Analysis Group, revised Feb 2013.

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