Assessing Systemic Fragility – A Probabilistic Perspective

SAFE Working Paper No. 70

39 Pages Posted: 25 Oct 2014

See all articles by Deyan Radev

Deyan Radev

Research Center SAFE, Goethe University Frankfurt

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2014

Abstract

We outline a procedure for consistent estimation of marginal and joint default risk in the euro area financial system. We interpret the latter risk as the intrinsic financial system fragility and derive several systemic fragility indicators for euro area banks and sovereigns, based on CDS prices. Our analysis documents that although the fragility of the euro area banking system had started to deteriorate before Lehman Brothers' file for bankruptcy, investors did not expect the crisis to affect euro area sovereigns' solvency until September 2008. Since then, and especially after November 2009, joint sovereign default risk has outpaced the rise of systemic risk within the banking system.

Keywords: Banking Stability, Financial Distress, Tail Risk, Contagion

JEL Classification: C16, C61, G01, G21

Suggested Citation

Radev, Deyan, Assessing Systemic Fragility – A Probabilistic Perspective (October 1, 2014). SAFE Working Paper No. 70. Available at SSRN: https://ssrn.com/abstract=2514279 or http://dx.doi.org/10.2139/ssrn.2514279

Deyan Radev (Contact Author)

Research Center SAFE, Goethe University Frankfurt ( email )

House of Finance
Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

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