IDEAS home Printed from https://ideas.repec.org/p/imf/imfwpa/2013-054.html
   My bibliography  Save this paper

Systemic Contingent Claims Analysis: Estimating Market-Implied Systemic Risk

Author

Listed:
  • Andreas Jobst
  • Mr. 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.

Suggested Citation

  • Andreas Jobst & Mr. Dale F Gray, 2013. "Systemic Contingent Claims Analysis: Estimating Market-Implied Systemic Risk," IMF Working Papers 2013/054, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2013/054
    as

    Download full text from publisher

    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=40356
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Jobst, Andreas A., 2014. "Measuring systemic risk-adjusted liquidity (SRL)—A model approach," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 270-287.
    2. 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 611-625, July.
    3. Black, Fischer & Cox, John C, 1976. "Valuing Corporate Securities: Some Effects of Bond Indenture Provisions," Journal of Finance, American Finance Association, vol. 31(2), pages 351-367, May.
    4. Bengt Holmstrom & Jean Tirole, 1997. "Financial Intermediation, Loanable Funds, and The Real Sector," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(3), pages 663-691.
    5. Bakshi, Gurdip & Cao, Charles & Chen, Zhiwu, 1997. "Empirical Performance of Alternative Option Pricing Models," Journal of Finance, American Finance Association, vol. 52(5), pages 2003-2049, December.
    6. De Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic risk: A survey," Working Paper Series 35, European Central Bank.
    7. International Monetary Fund, 2011. "The United States: Spillover Report: 2011 Article IV Consultation," IMF Staff Country Reports 2011/203, International Monetary Fund.
    8. Joseph P. Ogden, 1987. "Determinants Of The Ratings And Yields On Corporate Bonds: Tests Of The Contingent Claims Model," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 10(4), pages 329-340, December.
    9. Huang, Xin & Zhou, Hao & Zhu, Haibin, 2009. "A framework for assessing the systemic risk of major financial institutions," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2036-2049, November.
    10. Marco A. Espinosa‐Vega & Juan Solé, 2011. "Cross‐border financial surveillance: a network perspective," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 3(3), pages 182-205, August.
    11. Allen, Franklin & Babus, Ana & Carletti, Elena, 2010. "Financial Connections and Systemic Risk," Working Papers 10-20, University of Pennsylvania, Wharton School, Weiss Center.
    12. Khandani, Amir E. & Lo, Andrew W. & Merton, Robert C., 2013. "Systemic risk and the refinancing ratchet effect," Journal of Financial Economics, Elsevier, vol. 108(1), pages 29-45.
    13. Dimitrios Bisias & Mark Flood & Andrew W. Lo & Stavros Valavanis, 2012. "A Survey of Systemic Risk Analytics," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 255-296, October.
    14. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," The Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-343.
    15. Mr. C. A. E. Goodhart & Miguel A. Segoviano, 2009. "Banking Stability Measures," IMF Working Papers 2009/004, International Monetary Fund.
    16. International Monetary Fund, 2010. "United States: Publication of Financial Sector Assessment Program Documentation: Technical Note on Consolidated Regulation and Supervision," IMF Staff Country Reports 2010/251, International Monetary Fund.
    17. Marco A. Espinosa‐Vega & Juan Solé, 2011. "Cross‐border financial surveillance: a network perspective," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 3(3), pages 182-205, August.
    18. Allen, F. & Babus, A. & Carletti, E., 2010. "Financial Connections and Systemic Risk," Other publications TiSEM a0b338ca-5b3b-48f9-964f-d, Tilburg University, School of Economics and Management.
    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. Bank for International Settlements, 2011. "Macroprudential regulation and policy," BIS Papers, Bank for International Settlements, number 60.
    21. International Monetary Fund, 2011. "United Kingdom: Stress Testing the Banking Sector Technical Note," IMF Staff Country Reports 2011/227, International Monetary Fund.
    22. Mr. Jorge A Chan-Lau, 2010. "Regulatory Capital Charges for Too-Connected-to-Fail Institutions: A Practical Proposal," IMF Working Papers 2010/098, International Monetary Fund.
    23. International Monetary Fund, 2011. "Israel: Selected Issues," IMF Staff Country Reports 2011/023, International Monetary Fund.
    24. International Monetary Fund, 2010. "United States: Publication of Financial Sector Assessment Program Documentation: Technical Note on Stress Testing," IMF Staff Country Reports 2010/244, International Monetary Fund.
    25. International Monetary Fund, 2010. "Republic of Serbia: Financial Sector Assessment Program Update: Technical Note on Insurance Sector," IMF Staff Country Reports 2010/154, International Monetary Fund.
    26. Bank for International Settlements, 2012. "Operationalising the selection and application of macroprudential instruments," CGFS Papers, Bank for International Settlements, number 48, december.
    27. Pierre Collin‐Dufresne & Robert S. Goldstein, 2001. "Do Credit Spreads Reflect Stationary Leverage Ratios?," Journal of Finance, American Finance Association, vol. 56(5), pages 1929-1957, October.
    28. Segoviano, Miguel A. & Goodhart, Charles, 2009. "Banking stability measures," LSE Research Online Documents on Economics 24416, London School of Economics and Political Science, LSE Library.
    29. repec:bla:jfinan:v:53:y:1998:i:6:p:2059-2106 is not listed on IDEAS
    30. Allen, F. & Babus, A. & Carletti, E., 2010. "Financial Connections and Systemic Risk," Other publications TiSEM 76c1df26-9a76-424a-82b6-e, Tilburg University, School of Economics and Management.
    31. Nikola Tarashev & Claudio Borio & Kostas Tsatsaronis, 2009. "The systemic importance of financial institutions," BIS Quarterly Review, Bank for International Settlements, September.
    32. Mathias Drehmann & Nikola Tarashev, 2011. "Systemic importance: some simple indicators," BIS Quarterly Review, Bank for International Settlements, March.
    33. Andreas Jobst, 2007. "Operational Risk: The Sting is Still in the Tail But the Poison Dependson the Dose," IMF Working Papers 2007/239, International Monetary Fund.
    34. International Monetary Fund, 2011. "Germany: Technical Note on Stress Testing," IMF Staff Country Reports 2011/371, International Monetary Fund.
    35. Carr, Peter & Wu, Liuren, 2007. "Theory and evidence on the dynamic interactions between sovereign credit default swaps and currency options," Journal of Banking & Finance, Elsevier, vol. 31(8), pages 2383-2403, August.
    36. Monica Billio & Mila Getmansky & Andrew W. Lo & Loriana Pelizzon, 2010. "Econometric Measures of Systemic Risk in the Finance and Insurance Sectors," NBER Working Papers 16223, National Bureau of Economic Research, Inc.
    37. repec:bla:jfinan:v:53:y:1998:i:2:p:499-547 is not listed on IDEAS
    38. Christian Weistroffer, 2011. "Identifying Systemically Important Financial Institutions (SIFIs)," Working Papers id:4383, eSocialSciences.
    39. International Monetary Fund, 2012. "Spain: Financial System Stability Assessment," IMF Staff Country Reports 2012/137, International Monetary Fund.
    40. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
    41. Jan Ericsson & Joel Reneby, 2005. "Estimating Structural Bond Pricing Models," The Journal of Business, University of Chicago Press, vol. 78(2), pages 707-735, March.
    42. Ronn, Ehud I & Verma, Avinash K, 1986. "Pricing Risk-Adjusted Deposit Insurance: An Option-Based Model," Journal of Finance, American Finance Association, vol. 41(4), pages 871-895, September.
    43. Jin‐Chuan Duan, 1994. "Maximum Likelihood Estimation Using Price Data Of The Derivative Contract," Mathematical Finance, Wiley Blackwell, vol. 4(2), pages 155-167, April.
    44. 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.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jobst, Andreas A., 2014. "Measuring systemic risk-adjusted liquidity (SRL)—A model approach," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 270-287.
    2. 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.
    3. International Monetary Fund, 2011. "United Kingdom: Stress Testing the Banking Sector Technical Note," IMF Staff Country Reports 2011/227, International Monetary Fund.
    4. International Monetary Fund, 2011. "Germany: Technical Note on Stress Testing," IMF Staff Country Reports 2011/371, International Monetary Fund.
    5. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    6. López-Espinosa, Germán & Moreno, Antonio & Rubia, Antonio & Valderrama, Laura, 2012. "Short-term wholesale funding and systemic risk: A global CoVaR approach," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3150-3162.
    7. Ellis, Scott & Sharma, Satish & Brzeszczyński, Janusz, 2022. "Systemic risk measures and regulatory challenges," Journal of Financial Stability, Elsevier, vol. 61(C).
    8. Silva, Walmir & Kimura, Herbert & Sobreiro, Vinicius Amorim, 2017. "An analysis of the literature on systemic financial risk: A survey," Journal of Financial Stability, Elsevier, vol. 28(C), pages 91-114.
    9. Forte, Santiago & Lovreta, Lidija, 2012. "Endogenizing exogenous default barrier models: The MM algorithm," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1639-1652.
    10. Li, Ka Leung & Wong, Hoi Ying, 2008. "Structural models of corporate bond pricing with maximum likelihood estimation," Journal of Empirical Finance, Elsevier, vol. 15(4), pages 751-777, September.
    11. Dionne, Georges & Laajimi, Sadok, 2012. "On the determinants of the implied default barrier," Journal of Empirical Finance, Elsevier, vol. 19(3), pages 395-408.
    12. Reboredo, Juan C. & Ugolini, Andrea, 2015. "A vine-copula conditional value-at-risk approach to systemic sovereign debt risk for the financial sector," The North American Journal of Economics and Finance, Elsevier, vol. 32(C), pages 98-123.
    13. Abel Elizalde, 2006. "Credit Risk Models II: Structural Models," Working Papers wp2006_0606, CEMFI.
    14. Mr. Dimitri G Demekas, 2015. "Designing Effective Macroprudential Stress Tests: Progress So Far and the Way Forward," IMF Working Papers 2015/146, International Monetary Fund.
    15. Giampaolo Gabbi & Alesia Kalbaska & Alessandro Vercelli, 2014. "Factors generating and transmitting the financial crisis: The role of incentives: securitization and contagion," Working papers wpaper56, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    16. International Monetary Fund, 2010. "United States: Publication of Financial Sector Assessment Program Documentation: Technical Note on Stress Testing," IMF Staff Country Reports 2010/244, International Monetary Fund.
    17. Jin, Xisong & Nadal De Simone, Francisco de A., 2014. "Banking systemic vulnerabilities: A tail-risk dynamic CIMDO approach," Journal of Financial Stability, Elsevier, vol. 14(C), pages 81-101.
    18. Qin, Xiao & Zhou, Chen, 2021. "Systemic risk allocation using the asymptotic marginal expected shortfall," Journal of Banking & Finance, Elsevier, vol. 126(C).
    19. Afik, Zvika & Arad, Ohad & Galil, Koresh, 2016. "Using Merton model for default prediction: An empirical assessment of selected alternatives," Journal of Empirical Finance, Elsevier, vol. 35(C), pages 43-67.
    20. International Monetary Fund, 2011. "Sweden: Financial Sector Assessment Program Update: Technical Note on Contingent Claims Analysis Approach to Measure Risk and Stress Test the Swedish Banking Sector," IMF Staff Country Reports 2011/286, International Monetary Fund.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:2013/054. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Akshay Modi (email available below). General contact details of provider: https://edirc.repec.org/data/imfffus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.