A Framework for Assessing the Systemic Risk of Major Financial Institutions

Posted: 22 Mar 2009 Last revised: 17 Jan 2016

See all articles by Xin Huang

Xin Huang

Board of Governors of the Federal Reserve System

Hao Zhou

Tsinghua University - PBC School of Finance; SUSTech Business School

Haibin Zhu

Bank for International Settlements (BIS)

Multiple version iconThere are 3 versions of this paper

Date Written: October 1, 2008

Abstract

In this paper we propose a framework for measuring and stress testing the systemic risk for a group of major commercial banks and investment banks. The systemic risk is measured by the price of insurance against financial distresses, which is based on ex ante measures of default probabilities of individual banks and forecasted asset return correlations. Importantly, using realized correlations estimated from high-frequency equity return data can significantly improve the accuracy of forecasted correlations. In addition, our stress testing methodology, as an integrated micro-macro model, takes into account dynamic linkages between the health of major US banks and the macro-financial condition.

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Keywords: Stress testing, systemic risk, insurance premium, default probability, credit default swap spread, high-frequency data, asset return correlation

JEL Classification: G21, G28, G14, C13

Suggested Citation

Huang, Xin and Zhou, Hao and Zhu, Haibin, A Framework for Assessing the Systemic Risk of Major Financial Institutions (October 1, 2008). CAREFIN Research Paper No. 11/08, Available at SSRN: https://ssrn.com/abstract=1306877

Xin Huang (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Hao Zhou

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing, 100083
China
+86-10-62790655 (Phone)

SUSTech Business School ( email )

1088 Xueyuan Avenue, Nanshan District
Southern University of Science and Technology
Shenzhen, Guangdong 518055
China

Haibin Zhu

Bank for International Settlements (BIS) ( email )

Hong Kong
Hong Kong
852 2878 7145 (Phone)
852 2878 7123 (Fax)

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