Systemic Risk: What Defaults are Telling Us

Management Science, Vol. 57, No. 8, pp. 1387-1405, 2011

34 Pages Posted: 15 Sep 2009 Last revised: 18 Mar 2012

See all articles by Kay Giesecke

Kay Giesecke

Stanford University - Management Science & Engineering

Baeho Kim

Korea University Business School (KUBS)

Date Written: September 15, 2009

Abstract

This paper develops dynamic measures of the systemic risk of the financial sector as a whole. It defines systemic risk as the conditional probability of failure of a sufficiently large fraction of the total population of financial institutions. This definition recognizes that the cause of systemic distress is the correlated failure of institutions to meet obligations to creditors, customers, and trading partners. The likelihood estimators of the failure probability are based on a dynamic hazard model of correlated failure timing that captures the influence on failure timing of time-varying macro-economic and sector-specific risk factors, and of spillover effects. Tests indicate that our measures provide accurate out-of-sample forecasts of the term structure of systemic risk in the U.S. for the period 1998 to 2009.

Keywords: systemic risk, hazard model, spillover, covariates, intensity

Suggested Citation

Giesecke, Kay and Kim, Baeho, Systemic Risk: What Defaults are Telling Us (September 15, 2009). Management Science, Vol. 57, No. 8, pp. 1387-1405, 2011. Available at SSRN: https://ssrn.com/abstract=1474055 or http://dx.doi.org/10.2139/ssrn.1474055

Kay Giesecke (Contact Author)

Stanford University - Management Science & Engineering ( email )

473 Via Ortega
Stanford, CA 94305-9025
United States
(650) 723 9265 (Phone)
(650) 723 1614 (Fax)

HOME PAGE: http://www.stanford.edu/~giesecke/

Baeho Kim

Korea University Business School (KUBS) ( email )

Anam-dong, Sungbuk-Gu
Korea University Business School
Seoul, 136-701
82-2-3290-2626 (Phone)
82-2-922-7220 (Fax)

HOME PAGE: http://biz.korea.ac.kr/~baehokim

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