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Systemic Contingent Claims Analysis – Estimating Market-Implied Systemic Risk

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Author Info

  • 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; macroprudential policy and surveillance; contingent claims analysis (CCA); systemic CCA; systemic risk; conditional tail expectation (CTE); contingent liabilities; extreme value theory (EVT); risk-adjusted balance sheets; stress testing.;

References

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Citations

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Cited by:
  1. Nicolas Arregui & Mohamed Norat & Antonio Pancorbo & Jodi G. Scarlata & Eija Holttinen & Fabiana Melo & Jay Surti & Christopher Wilson & Rodolfo Wehrhahn & Mamoru Yanase, 2013. "Addressing Interconnectedness: Concepts and Prudential Tools," IMF Working Papers 13/199, International Monetary Fund.
  2. 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.
  3. Martín Saldías, 2012. "Systemic Risk Analysis using Forward-Looking Distance-to-Default Series," Working Papers w201216, Banco de Portugal, Economics and Research Department.
  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. Andreas A. Jobst & Li L. Ong & Christian Schmieder, 2013. "A Framework for Macroprudential Bank Solvency Stress Testing: Application to S-25 and Other G-20 Country FSAPs," IMF Working Papers 13/68, International Monetary Fund.

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