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Measuring Systemic Risk-Adjusted Liquidity (SRL)

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  • Andreas Jobst

Abstract

Little progress has been made so far in addressing—in a comprehensive way—the externalities caused by impact of the interconnectedness within institutions and markets on funding and market liquidity risk within financial systems. The Systemic Risk-adjusted Liquidity (SRL) model combines option pricing with market information and balance sheet data to generate a probabilistic measure of the frequency and severity of multiple entities experiencing a joint liquidity event. It links a firm’s maturity mismatch between assets and liabilities impacting the stability of its funding with those characteristics of other firms, subject to individual changes in risk profiles and common changes in market conditions. This approach can then be used (i) to quantify an individual institution’s time-varying contribution to system-wide liquidity shortfalls and (ii) to price liquidity risk within a macroprudential framework that, if used to motivate a capital charge or insurance premia, provides incentives for liquidity managers to internalize the systemic risk of their decisions. The model can also accommodate a stress testing approach for institution-specific and/or general funding shocks that generate estimates of systemic liquidity risk (and associated charges) under adverse scenarios.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/209.

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Length: 69
Date of creation: 01 Aug 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/209

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Related research

Keywords: Banking sector; Economic models; Risk management; financial institutions; financial stability; present value; liquidity support; financial system; financial sector; bond; derivative; cash flow; risk-free interest rate; asset liquidation; bond yields; financial markets; partial derivative; government bond; equity market; financial economics; moral hazard; financial contagion; financial intermediaries; money market; government bond yields; financial services; net cash flows; bond prices; financial systems; discount rate; financial intermediation; derivative assets; savings deposits; derivative contract; cash flow models; option valuation; equity markets; cash flows; discounted present value; stock market; financial instability; reserve requirement; hedging; money market investments; money market interest; financial bond; financial statements; money market interest rates; valuation of assets; deposit insurance premiums; deposit insurance; equity capital;

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References

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  1. Gary B. Gorton & Andrew Metrick, 2009. "Securitized Banking and the Run on Repo," NBER Working Papers 15223, National Bureau of Economic Research, Inc.
  2. David Aikman & Piergiorgio Alessandri & Bruno Eklund & Prasanna Gai & Sujit Kapadia, & Elizabeth Martin, & Nada Mora & Gabriel Sterne & Matthew Willison, 2011. "Funding Liquidity Risk in a Quantitative Model of Systemic Stability," Central Banking, Analysis, and Economic Policies Book Series, in: Rodrigo Alfaro (ed.), Financial Stability, Monetary Policy, and Central Banking, edition 1, volume 15, chapter 12, pages 371-410 Central Bank of Chile.
  3. Andrei Shleifer & Robert W. Vishny, 2010. "Fire Sales in Finance and Macroeconomics," NBER Working Papers 16642, National Bureau of Economic Research, Inc.
  4. Jan Ericsson, 2005. "Estimating Structural Bond Pricing Models," The Journal of Business, University of Chicago Press, vol. 78(2), pages 707-735, March.
  5. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
  6. Jobst, Andreas A., 2013. "Multivariate dependence of implied volatilities from equity options as measure of systemic risk," International Review of Financial Analysis, Elsevier, vol. 28(C), pages 112-129.
  7. Christian Weistroffer, 2011. "Identifying Systemically Important Financial Institutions (SIFIs)," Working Papers id:4383, eSocialSciences.
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Cited by:
  1. Jan Willem van den End, 2013. "A macroprudential approach to address liquidity risk with the Loan-to-Deposit ratio," DNB Working Papers 372, Netherlands Central Bank, Research Department.
  2. Andreas A. Jobst & Dale F. Gray, 2013. "Systemic Contingent Claims Analysis," IMF Working Papers 13/54, International Monetary Fund.
  3. Jobst, Andreas A., 2013. "Multivariate dependence of implied volatilities from equity options as measure of systemic risk," International Review of Financial Analysis, Elsevier, vol. 28(C), pages 112-129.

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