New Framework for Measuring and Managing Macrofinancial Risk and Financial Stability
32 Pages Posted: 27 Nov 2007 Last revised: 7 Sep 2022
Date Written: November 2007
Abstract
This paper proposes a new approach to improve the way central banks can analyze and manage the financial risks of a national economy. It is based on the modern theory and practice of contingent claims analysis (CCA), which is successfully used today at the level of individual banks by managers, investors, and regulators. The basic analytical tool is the risk-adjusted balance sheet, which shows the sensitivity of the enterprise's assets and liabilities to external "shocks." At the national level, the sectors of an economy are viewed as interconnected portfolios of assets, liabilities, and guarantees -- some explicit and others implicit. Traditional approaches have difficulty analyzing how risks can accumulate gradually and then suddenly erupt in a full-blown crisis. The CCA approach is well-suited to capturing such "non-linearities" and to quantifying the effects of asset-liability mismatches within and across institutions. Risk-adjusted CCA balance sheets facilitate simulations and stress testing to evaluate the potential impact of policies to manage systemic risk.
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
A New Framework for Analyzing and Managing Macrofinancial Risks of an Economy
By Zvi Bodie, Dale F. Gray, ...
-
Measuring and Analyzing Sovereign Risk with Contingent Claims
By Michael Gapen, Dale F. Gray, ...
-
A New Framework for Analyzing and Managing Macrofinancial Risks of an Economy
By Zvi Bodie, Dale F. Gray, ...
-
Transparency, Risk Management and International Financial Fragility
By Mario Draghi, Francesco Giavazzi, ...
-
Transparency, Risk Management and International Financial Fragility
By Mario Draghi, Francesco Giavazzi, ...
-
By Michael Gapen, Cheng Hoon Lim, ...
-
Dollarization of Liabilities: Underinsurance and Domestic Financial Underdevelopment
-
Dollarization of Liabilities: Underinsurance and Domestic Financial Underdevelopment