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Systemic Contingent Claims Analysis

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  • Andreas A. Jobst
  • Dale F. Gray

Abstract

The recent global financial crisis has forced a re-examination of risk transmission in the financial sector and how it affects financial stability. Current macroprudential policy and surveillance (MPS) efforts are aimed establishing a regulatory framework that helps mitigate the risk from systemic linkages with a view towards enhancing the resilience of the financial sector. This paper presents a forward-looking framework ("Systemic CCA") to measure systemic solvency risk based on market-implied expected losses of financial institutions with practical applications for the financial sector risk management and the system-wide capital assessment in top-down stress testing. The suggested approach uses advanced contingent claims analysis (CCA) to generate aggregate estimates of the joint default risk of multiple institutions as a conditional tail expectation using multivariate extreme value theory (EVT). In addition, the framework also helps quantify the individual contributions to systemic risk and contingent liabilities of the financial sector during times of stress.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/54.

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Length: 93
Date of creation: 27 Feb 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/54

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Related research

Keywords: Financial sector; Financial institutions; Banks; Risk management; capital adequacy; present value; financial crisis; financial system; financial stability; recession; bond; derivative; equity market; pre-crisis; banking supervision; deposit insurance; risk-free interest rate; partial derivative; systemic crisis; bond holders; financial distress; discount rate; corporate bond; financial sector performance; financial market; equity capital; cash flows; discounted present value; financial services; global financial crisis; contagion; moral hazard; debt crisis; severe recession; debt restructuring; financial crises; equity markets; asset liquidation; equity valuation; banking distress; available cash flows; par bond; bondholders; bond spreads; deposit insurance premiums; cash flows from operations; sovereign debt crisis; asset valuation;

References

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  1. Jan Ericsson, 2005. "Estimating Structural Bond Pricing Models," The Journal of Business, University of Chicago Press, vol. 78(2), pages 707-735, March.
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  10. Andreas Jobst, 2012. "Measuring Systemic Risk-Adjusted Liquidity (SRL)," IMF Working Papers 12/209, International Monetary Fund.
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  12. Bakshi, Gurdip & Cao, Charles & Chen, Zhiwu, 1997. " Empirical Performance of Alternative Option Pricing Models," Journal of Finance, American Finance Association, vol. 52(5), pages 2003-49, December.
  13. Jones, E Philip & Mason, Scott P & Rosenfeld, Eric, 1984. " Contingent Claims Analysis of Corporate Capital Structures: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 39(3), pages 611-25, July.
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  17. Christian Weistroffer, 2011. "Identifying Systemically Important Financial Institutions (SIFIs)," Working Papers id:4383, eSocialSciences.
  18. 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.
  19. Longstaff, Francis A & Schwartz, Eduardo S, 1995. " A Simple Approach to Valuing Risky Fixed and Floating Rate Debt," Journal of Finance, American Finance Association, vol. 50(3), pages 789-819, July.
  20. Charles Quanwei Cao & Gurdip S. Bakshi & Zhiwu Chen, 1997. "Empirical Performance of Alternative Option Pricing Models," Yale School of Management Working Papers ysm65, Yale School of Management.
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Citations

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Cited by:
  1. Andreas A. Jobst & Li L. Ong & Christian Schmieder, 2013. "A Framework for Macroprudential Bank Solvency Stress Testing," IMF Working Papers 13/68, International Monetary Fund.
  2. Nicolas Arregui & Mohamed Norat & Antonio Pancorbo & Jodi G. Scarlata & Eija Holttinen & Fabiana Melo & Jay Surti & Christopher Wilson & Rodolfo Wehrhahn & Mamoru Yanase, 2013. "Addressing Interconnectedness," IMF Working Papers 13/199, International Monetary Fund.
  3. Saldías, Martín, 2013. "Systemic risk analysis using forward-looking Distance-to-Default series," Journal of Financial Stability, Elsevier, vol. 9(4), pages 498-517.
  4. Sessi Tokpavi, 2013. "Testing for the Systemically Important Financial Institutions: a Conditional Approach," EconomiX Working Papers 2013-27, University of Paris West - Nanterre la Défense, EconomiX.
  5. Dale F. Gray, 2013. "Modeling Banking, Sovereign, and Macro Risk in a CCA Global VAR," IMF Working Papers 13/218, International Monetary Fund.
  6. Weiß, Gregor N.F. & Bostandzic, Denefa & Neumann, Sascha, 2014. "What factors drive systemic risk during international financial crises?," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 78-96.

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