Modeling Systemic Risks in Financial Markets

Abstract

We survey systemic risks to financial markets and present a high-level description of an algorithm that measures systemic risk in terms of coupled networks.

Systemic risk to financial markets is often defined as the risk of a major and rapid disruption in one or more of the core functions of the financial system caused by the initial failure of one or more financial firms or a segment of the financial system. This widely accepted definition sets systemic risks in financial markets as a different class of risk agents in the market face, distinct from more conventional kinds of primary and secondary risks due to a position in a certain security or more generally risks that remain in one's portfolio due to mis-hedges.

Keywords: systemic risk, coupled networks, OTC derivatives markets, geopolitical risk

JEL Classification: D80, G28