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A macroeconomic framework for quantifying systemic risk

  • Zhiguo He

    ()

    (University of Chicago, Booth School of Business
    NBER)

  • Arvind Krishnamurthy

    ()

    (Northwestern University,Kellogg School of Management
    NBER)

Registered author(s):

    Systemic risk arises when shocks lead to states where a disruption in financial intermediation adversely affects the economy and feeds back into further disrupting financial intermediation. We present a macroeconomic model with a financial intermediary sector subject to an equity capital constraint. The novel aspect of our analysis is that the model produces a stochastic steady state distribution for the economy, in which only some of the states correspond to systemic risk states. The model allows us to examine the transition from “normal” states to systemic risk states. We calibrate our model and use it to match the systemic risk apparent during the 2007/2008 financial crisis. We also use the model to compute the conditional probabilities of arriving at a systemic risk state, such as 2007/2008. Finally, we show how the model can be used to conduct a Fed “stress test” linking a stress scenario to the probability of systemic risk states.

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    File URL: https://www.nbb.be/doc/oc/repec/reswpp/wp233en.pdf
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    Paper provided by National Bank of Belgium in its series Working Paper Research with number 233.

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    Length: 53 pages
    Date of creation: Oct 2012
    Date of revision:
    Handle: RePEc:nbb:reswpp:201210-233
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    1. repec:fip:fedgsq:y:2009:x:6 is not listed on IDEAS
    2. Xin Huang & Hao Zhou & Haibin Zhu, 2009. "A Framework for Assessing the Systemic Risk of Major Financial Institutions," BIS Working Papers 281, Bank for International Settlements.
    3. Stefano Giglio, 2011. "Credit default swap spreads and systemic financial risk," Proceedings 1122, Federal Reserve Bank of Chicago.
    4. Ben S. Bernanke, 2009. "Financial reform to address systemic risk: a speech at the Council on Foreign Relations, Washington, D.C., March 10, 2009," Speech 448, Board of Governors of the Federal Reserve System (U.S.).
    5. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
    6. Adrian, Tobias & Shin, Hyun Song, 2010. "Liquidity and leverage," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 418-437, July.
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