Systemic risk, financial contagion and financial fragility
Although it is hard to arrive at a widely accepted definition for Systemic Risk; it is generally acknowledged that it is the risk of the occurrence of an event that threatens the well functioning of the system of interest (financial, payments, banking, etc.) sometimes to the point of making its operation impossible. We model systemic risk with two main components: a random shock that weakens one or more financial institutions and a transmission mechanism which transmits and possibly exacerbates such negative effects to the rest of the system. Our model could be conceptually represented by a network already described in previous works. In this work we show how is possible to estimate the distribution of losses for the banking system with our model. Additionally, we show how it is possible to separate the distribution of losses into two components: the losses incurred by the initial shock and the losses resulting from the contagion process. Finally, once the distribution is estimated, we can derive standard risk measures for the system as a whole. Another important contribution of this work is that we can follow the evolution of certain risk measures like the expected loss or the CVaR in order to evaluate if the system is becoming more or less risky, in fact, more or less fragile. Additionally, we can decompose the distribution of losses of the whole banking system into the systemic and the contagion elements and we can determine if the system is more prone to experience contagious difficulties during a certain period of time.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lehar, Alfred, 2005. "Measuring systemic risk: A risk management approach," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2577-2603, October.
- Michael Boss & Helmut Elsinger & Martin Summer & Stefan Thurner, 2004. "Network topology of the interbank market," Quantitative Finance, Taylor & Francis Journals, vol. 4(6), pages 677-684.
- Jeannette Müller, 2006. "Interbank Credit Lines as a Channel of Contagion," Journal of Financial Services Research, Springer;Western Finance Association, vol. 29(1), pages 37-60, February.
- Sanjeev Goyal, 2007. "Introduction to Connections: An Introduction to the Economics of Networks," Introductory Chapters, in: Connections: An Introduction to the Economics of Networks Princeton University Press.
- Iori, Giulia & Jafarey, Saqib, 2001.
"Criticality in a model of banking crises,"
Physica A: Statistical Mechanics and its Applications,
Elsevier, vol. 299(1), pages 205-212.
- Michael Boss & Gerald Krenn & Claus Puhr & Martin Summer, 2006. "Systemic Risk Monitor: A Model for Systemic Risk Analysis and Stress Testing of Banking Systems," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 11, pages 83-95.
- de Bandt, Olivier & Hartmann, Philipp, 2000.
"Systemic Risk: A Survey,"
CEPR Discussion Papers
2634, C.E.P.R. Discussion Papers.
- Dimitrios Tsomocos, 2003.
"Equilibrium Analysis, Banking, Contagion and Financial Fragility,"
OFRC Working Papers Series
2003fe03, Oxford Financial Research Centre.
- Dimitrios Tsomocos, 2003. "Equilibrium analysis, banking, contagion and financial fragility," FMG Discussion Papers dp450, Financial Markets Group.
- Dimitrios P Tsomocos, 2003. "Equilibrium analysis, banking, contagion and financial fragility," Bank of England working papers 175, Bank of England.
- Dimitrios P. Tsomocos, 2003. "Equilibrium analysis, banking, contagion and financial fragility," LSE Research Online Documents on Economics 24826, London School of Economics and Political Science, LSE Library.
- Christian Upper, 2007. "Using counterfactual simulations to assess the danger of contagion in interbank markets," BIS Working Papers 234, Bank for International Settlements.
- Michael Boss & Helmut Elsinger & Martin Summer & Stefan Thurner, 2004. "An Empirical Analysis of the Network Structure of the Austrian Interbank Market," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 7, pages 77-87.
- Bartram, Söhnke M. & Brown, Gregory W. & Hund, John E., 2005.
"Estimating Systemic Risk in the International Financial System,"
6658, University Library of Munich, Germany.
- Bartram, Sohnke M. & Brown, Gregory W. & Hund, John E., 2007. "Estimating systemic risk in the international financial system," Journal of Financial Economics, Elsevier, vol. 86(3), pages 835-869, December.
When requesting a correction, please mention this item's handle: RePEc:eee:dyncon:v:34:y:2010:i:11:p:2358-2374. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.