Measuring Systemic Risk-Adjusted Liquidity (SRL) — A Model Approach

52 Pages Posted: 1 Apr 2013 Last revised: 16 May 2014

Multiple version iconThere are 2 versions of this paper

Date Written: June 4, 2013

Abstract

Little progress has been made so far in addressing — in a comprehensive way — the externalities caused by impact of the interconnectedness within institutions and markets on funding and market liquidity risk within financial systems. The Systemic Risk-adjusted Liquidity (SRL) model combines option pricing with market information and balance sheet data to generate a probabilistic measure of the frequency and severity of multiple entities experiencing a joint liquidity event. It links a firm’s maturity mismatch between assets and liabilities impacting the stability of its funding with those characteristics of other firms, subject to individual changes in risk profiles and common changes in market conditions. This approach can then be used (i) to quantify an individual institution’s time-varying contribution to system-wide liquidity shortfalls and (ii) to price liquidity risk within a macroprudential framework that, if used to motivate a capital charge or insurance premia, provides incentives for liquidity managers to internalize the systemic risk of their decisions. The model can also accommodate a stress testing approach for institution-specific and/or general funding shocks that generate estimates of systemic liquidity risk (and associated charges) under adverse scenarios.

Keywords: systemic risk, liquidity risk, Net Stable Funding Ratio (NSFR), extreme value theory, financial contagion, macroprudential regulation

JEL Classification: C46, C51, G01, G13, G21, G28, G58

Suggested Citation

Jobst, Andreas A., Measuring Systemic Risk-Adjusted Liquidity (SRL) — A Model Approach (June 4, 2013). Systemic Risk: Liquidity Risk, Governance and Financial Stability, Available at SSRN: https://ssrn.com/abstract=2242698 or http://dx.doi.org/10.2139/ssrn.2242698

Andreas A. Jobst (Contact Author)

Central Bank of the UAE ( email )

Abu Dhabi, Abu Dhabi
United Arab Emirates
+971-543439374 (Phone)

HOME PAGE: http://https://www.linkedin.com/in/andyjobst/

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