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“Too central to fail” systemic risk measure using PageRank algorithm

Author

Listed:
  • Yun, Tae-Sub
  • Jeong, Deokjong
  • Park, Sunyoung

Abstract

Following the popularity of the concepts of “too big to fail” and “too connected to fail” after the global financial crisis, the concept of “too central to fail” has garnered considerable attention recently. In this study, we suggest a “too central to fail” systemic risk measure, Rank, using the PageRank algorithm. Then, adopting a centrality perspective, we compare this measure, which effectively captures network relationships among financial institutions, with other well-known systemic risk measures, conditional value at risk (CoVaR) and marginal expected shortfall (MES). First, we model a simulation that generates bilateral connections among financial institutions. Second, we use real market data representing United States financial institutions. We show that Rank can capture the network structure among financial institutions better than CoVaR and MES. Further, Rank does not have procyclical properties; therefore, it is not dependent on market conditions. This study contributes to the development of a timely measure using publicly available market data. The measure also overcomes the shortcomings of the balance sheet-based approach, which is subject to time lags, because financial institutions release balance sheets quarterly basis. We also include equity and liability-type assets, in which systemic risks mainly propagate through intricately connected liability obligations. The findings will help regulators and policy-makers understand the implications of monitoring systemic risks from a network perspective.

Suggested Citation

  • Yun, Tae-Sub & Jeong, Deokjong & Park, Sunyoung, 2019. "“Too central to fail” systemic risk measure using PageRank algorithm," Journal of Economic Behavior & Organization, Elsevier, vol. 162(C), pages 251-272.
  • Handle: RePEc:eee:jeborg:v:162:y:2019:i:c:p:251-272
    DOI: 10.1016/j.jebo.2018.12.021
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    More about this item

    Keywords

    Systemic risk; Network structure; Centrality; Too central to fail; Simulation; PageRank;

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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