6533b834fe1ef96bd129dfe3
RESEARCH PRODUCT
Early warning of systemic risk in global banking: eigen-pair R number for financial contagion and market price-based methods
Simone GiansanteSheri M MarkoseNicolas A. EterovicMateusz GatkowskiMateusz Gatkowskisubject
050208 financeFinancial contagionParadoxical risk measures05 social sciencesGlobal financial networksGeneral Decision SciencesManagement Science and Operations ResearchTipping point (climatology)Statistical market price-based risk measuresEigen-pair analysisCapital (economics)0502 economics and businessSystemic riskMarket priceCapital requirementSystemic riskEconomicsEconometricsBalance sheetEarly warning signalsAsset (economics)050207 economicsOR in bankingdescription
AbstractWe 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 (SRIs), viz. Marginal Expected Shortfall (MES), Delta Conditional Value-at-Risk (Delta-CoVaR), and Conditional Capital Shortfall Measure of Systemic Risk (SRISK) 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.
| year | journal | country | edition | language |
|---|---|---|---|---|
| 2021-06-02 | Annals of Operations Research |