Early Warning and Systemic Risk in Core Global Banking: Balance Sheet Financial Network and Market Price-Based Methods
61 Pages Posted: 17 Jan 2017
Date Written: February 1, 2017
We analyse systemic risk in the 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. MES (Marginal Expected Shortfall), ∆CoVaR, and SRISK in a cross-border setting. Unlike paradoxical risk measures, the eigen-pair method gives early-warning of instability in terms of tipping points identified by regulatory capital thresholds and centrality measures for 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.
Keywords: Global Financial Networks, Systemic Risk, Early Warning Signals, Eigen-Pair Analysis, Statistical Market Price-Based Risk Measures, Paradoxical Risk Measures
JEL Classification: G21, G15, G28, E44, C63.
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