Systemic Financial Risk Inference in a Global Setting

29 Pages Posted: 16 Aug 2014

See all articles by Jeffrey Sheen

Jeffrey Sheen

Macquarie University; Financial Research Network (FIRN); Macquarie University, Macquarie Business School

Stefan Trück

Macquarie University Sydney - Department of Applied Finance and Actuarial Studies; Financial Research Network (FIRN); Centre for International Finance and Regulation (CIFR); Macquarie University, Macquarie Business School

Chi Truong

Macquarie University; Financial Research Network (FIRN); Macquarie University, Macquarie Business School

Ben Zhe Wang

Macquarie University, Macquarie Business School

Multiple version iconThere are 2 versions of this paper

Date Written: August 15, 2014

Abstract

We propose a new top-down approach to measure systemic risk in the financial system. Our framework uses a combination of macroeconomic, financial and rating factors in representative regions of the world. We formulate a mixed-frequency state-space model to estimate macroeconomic factors. To derive financial risk factors, we use Moody's/KMV expected default frequencies after accounting for ratings of major financial institutions in the considered regions. The estimated factors are combined to derive probabilities for systemically relevant defaults in the financial industry. Regional macroeconomic factors are significant predictors of the existence and number of systemically important defaults, while regional financial risk and ratings factors are relevant for the existence only. For major events, global credit risk also matters.

Keywords: Systemic financial risk, Factor models, Mixed frequency models, Kalman filter, State-space model, Hurdle model

JEL Classification: C33, E44, G01, G17

Suggested Citation

Sheen, Jeffrey and Trueck, Stefan and Truong, Chi and Wang, Ben Zhe, Systemic Financial Risk Inference in a Global Setting (August 15, 2014). 27th Australasian Finance and Banking Conference 2014 Paper, Available at SSRN: https://ssrn.com/abstract=2480906 or http://dx.doi.org/10.2139/ssrn.2480906

Jeffrey Sheen (Contact Author)

Macquarie University ( email )

Department of Economics
Macquarie University
Sydney, NSW 2109
Australia
+61 2 9850 7287 (Phone)
+61 2 9850 8324 (Fax)

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

Stefan Trueck

Macquarie University Sydney - Department of Applied Finance and Actuarial Studies ( email )

North Ryde
Sydney, New South Wales 2109
Australia
61298508483 (Phone)
61298508483 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

Chi Truong

Macquarie University ( email )

North Ryde
Sydney, New South Wales 2109
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

Ben Zhe Wang

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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