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Early warning of systemic risk in global banking: eigen-pair R number for financial contagion and market price-based methods

Markose, Sheri and Giansante, Simone and Eterovic, Nicolas A and Gatkowski, Mateusz (2021) 'Early warning of systemic risk in global banking: eigen-pair R number for financial contagion and market price-based methods.' Annals of Operations Research. ISSN 0254-5330

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Abstract

We analyse systemic risk in the core global banking system using a new network-based spectral eigen-pair method, which treats network failure as a dynamical system stability problem. This is compared with market price-based Systemic Risk Indexes, viz. Marginal Expected Shortfall, Delta Conditional Value-at-Risk, and Conditional Capital Shortfall Measure of Systemic Risk in a cross-border setting. Unlike paradoxical market price based risk measures, which underestimate risk during periods of asset price booms, the eigen-pair method based on bilateral balance sheet data gives early-warning of instability in terms of the tipping point that is analogous to the R number in epidemic models. For this regulatory capital thresholds are used. Furthermore, network centrality measures identify systemically important and vulnerable banking systems. Market price-based SRIs are contemporaneous with the crisis and they are found to covary with risk measures like VaR and betas.

Item Type: Article
Uncontrolled Keywords: OR in banking; Global financial networks; Systemic risk; Early warning signals; Eigen-pair analysis; Statistical market price-based risk measures; Paradoxical risk measures
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Elements
Date Deposited: 02 Jul 2021 08:41
Last Modified: 02 Jul 2021 08:41
URI: http://repository.essex.ac.uk/id/eprint/30689

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