A Macroeconomic Framework for Quantifying Systemic Risk
University of Chicago - Booth School of Business, and NBER
Northwestern University - Kellogg School of Management
November 1, 2012
Swiss Finance Institute Research Paper No. 13-42
Chicago Booth Research Paper No. 12-37
Fama-Miller Working Paper
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 macroeconomic “stress test” linking a stress scenario to the probability of systemic risk states.
Number of Pages in PDF File: 47
Keywords: Liquidity, Delegation, Financial Intermediation, Crises, Financial Friction, Constraints
JEL Classification: G12, G2, E44working papers series
Date posted: August 21, 2012 ; Last revised: November 19, 2013
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