Assessing Systemic Risk Due to Fire Sales Spillover Through Maximum Entropy Network Reconstruction

41 Pages Posted: 4 Aug 2015 Last revised: 23 Jun 2018

Domenico Di Gangi

Scuola Normale Superiore

Fabrizio Lillo

Università di Bologna

Davide Pirino

Department of Economics and Finance, University of Rome "Tor Vergata"

Date Written: January 15, 2018

Abstract

Monitoring and assessing systemic risk in financial markets is of great importance but it often requires data that are unavailable or available at a very low frequency. For this reason, systemic risk assessment with partial information is potentially very useful for regulators and other stakeholders. In this paper we consider systemic risk due to fire sales spillovers and portfolio rebalancing by using the risk metrics defined by Greenwood et al. (2015). By using a method based on the constrained minimization of the Cross Entropy, we show that it is possible to assess aggregated and single bank’s systemicness and vulnerability, using only the information on the size of each bank and the capitalization of each investment asset. We also compare our approach with an alternative widespread application of the Maximum Entropy principle allowing to derive graph probability distributions and generating scenarios and we use it to propose a statistical test for a change in banks’ vulnerability to systemic events.

Keywords: systemic risk, maximum entropy, fire-sales, bank vulnerability, bank systemicness,matrix balancing, weighted configuration model

JEL Classification: C45, C80, G01, G33

Suggested Citation

Di Gangi, Domenico and Lillo, Fabrizio and Pirino, Davide, Assessing Systemic Risk Due to Fire Sales Spillover Through Maximum Entropy Network Reconstruction (January 15, 2018). Available at SSRN: https://ssrn.com/abstract=2639178 or http://dx.doi.org/10.2139/ssrn.2639178

Domenico Di Gangi

Scuola Normale Superiore ( email )

Piazza dei Cavalieri, 7
Pisa, Pi 56126
Italy

Fabrizio Lillo

Università di Bologna ( email )

Via Zamboni, 33
Bologna, 40126
Italy

Davide Pirino (Contact Author)

Department of Economics and Finance, University of Rome "Tor Vergata" ( email )

Via Columbia 2
Rome, Lazio 00133
Italy

Register to save articles to
your library

Register

Paper statistics

Downloads
210
rank
134,864
Abstract Views
1,136
PlumX