Early Warning and Systemic Risk in Core Global Banking: Balance Sheet Financial Network and Market Price-Based Methods

61 Pages Posted: 17 Jan 2017  

Sheri M. Markose

University of Essex - Department of Economics

Simone Giansante

University of Bath - School of Management

Nicolas A. Eterovic

University of Essex

Mateusz Gatkowski

University of Essex - Centre for Computational Finance and Economic Agents

Date Written: February 1, 2017

Abstract

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.

Suggested Citation

Markose, Sheri M. and Giansante, Simone and Eterovic, Nicolas A. and Gatkowski, Mateusz, Early Warning and Systemic Risk in Core Global Banking: Balance Sheet Financial Network and Market Price-Based Methods (February 1, 2017). Available at SSRN: https://ssrn.com/abstract=2899930 or http://dx.doi.org/10.2139/ssrn.2899930

Sheri M. Markose (Contact Author)

University of Essex - Department of Economics ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom
01206 87 2742 (Phone)

Simone Giansante

University of Bath - School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

HOME PAGE: http://people.bath.ac.uk/sg473/index.html

Nicolas A. Eterovic

University of Essex ( email )

Wivenhoe Park
Colchester, Essex CO7 9QZ
United Kingdom

Mateusz Gatkowski

University of Essex - Centre for Computational Finance and Economic Agents ( email )

Wivenhoe Park
Colchester, Essex CO4 3SQ
United Kingdom

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