Measuring Systemic Risk-Adjusted Liquidity (SRL): A Model Approach

70 Pages Posted: 9 Apr 2013

See all articles by Andreas (Andy) Jobst

Andreas (Andy) Jobst

International Monetary Fund (IMF) - European Department

Multiple version iconThere are 2 versions of this paper

Date Written: August 2012

Abstract

Little progress has been made so far in addressing - in a comprehensive way - the externalities caused by impact of the interconnectedness within institutions and markets on funding and market liquidity risk within financial systems. The Systemic Risk-adjusted Liquidity (SRL) model combines option pricing with market information and balance sheet data to generate a probabilistic measure of the frequency and severity of multiple entities experiencing a joint liquidity event. It links a firm’s maturity mismatch between assets and liabilities impacting the stability of its funding with those characteristics of other firms, subject to individual changes in risk profiles and common changes in market conditions. This approach can then be used (i) to quantify an individual institution’s time-varying contribution to system-wide liquidity shortfalls and (ii) to price liquidity risk within a macroprudential framework that, if used to motivate a capital charge or insurance premia, provides incentives for liquidity managers to internalize the systemic risk of their decisions. The model can also accommodate a stress testing approach for institution-specific and/or general funding shocks that generate estimates of systemic liquidity risk (and associated charges) under adverse scenarios.

Keywords: Banking sector, Economic models, Risk management, financial institutions, financial stability, present value, liquidity support, financial system, financial sector, bond, derivative, cash flow, risk-free interest rate, asset liquidation, bond yields, financial markets, partial derivative, government bond, equity market, financial economics, moral hazard, financial contagion, financial intermediaries, money market, government bond yields, financial services, net cash flows, bond prices, financial systems, discount rate, financial intermediation, derivative assets, savings deposits, derivative contract, cash flow models, option valuation, equity markets, cash flows, discounted present value, s

JEL Classification: C44, C51, G13, G21, G28

Suggested Citation

Jobst, Andreas A., Measuring Systemic Risk-Adjusted Liquidity (SRL): A Model Approach (August 2012). IMF Working Paper No. 12/209. Available at SSRN: https://ssrn.com/abstract=2247219

Andreas A. Jobst (Contact Author)

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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