New Directions in Financial Sector and Sovereign Risk Management

Journal of Investment Management (JOIM), First Quarter 2010

Posted: 13 Mar 2010 Last revised: 19 Oct 2010

See all articles by Dale F. Gray

Dale F. Gray

International Monetary Fund (IMF); MF Risk

Andreas (Andy) Jobst

International Monetary Fund (IMF) - European Department

Date Written: March 11, 2010

Abstract

The global financial crisis that began in 2007 has forced a re-examination of macroeconomics, financial economics, regulation, and risk management. Traditional macroeconomics overlooks the importance of risk which makes it ill-suited to analyze risk transmission, contagion and how risks can build up and suddenly erupt in a full blown crisis. Risk management concentrates on analysis of risk at the level of the individual institution. What has been missing is comprehensive analysis of systemic financial risk and its links to sovereign risk. This essay illustrates how risk management tools and contingent claims analysis (CCA) can be applied in new ways to the financial system, to economic sectors and the national economy. CCA is a valuable tool to improve systemic financial sector and sovereign risk management. A new framework is developed to help the measurement, analysis and management of systemic risk with immediate practical application to the analysis of government risk exposures, their associated contingent liablitities, and potential destabilizing feedback processes between the financial sector and the sovereign balance sheet. In this regard, a new framework called “Systemic CCA” is described and an illustration of its application is given. This paper concludes with proposals on several new directions in managing financial sector and sovereign risk.

Keywords: Contingent claims analysis (CCA), default risk, systemic risk, systemic CCA, debt guarantees, sovereign risk, multivariate extreme value distributions

JEL Classification: G00

Suggested Citation

Gray, Dale F. and Jobst, Andreas A., New Directions in Financial Sector and Sovereign Risk Management (March 11, 2010). Journal of Investment Management (JOIM), First Quarter 2010. Available at SSRN: https://ssrn.com/abstract=1568895

Dale F. Gray (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

MF Risk

5921 Searl Terrace
Bethesda, MD 20816

Andreas A. Jobst

International Monetary Fund (IMF) - European Department ( email )

700 19th Street NW
Washington, DC 20431
United States
+1-202-538-2898 (Phone)

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