Monitoring Risk in the Financial System Using Time Series Methods

29 Pages Posted: 17 Feb 2016

See all articles by Piet De Jong

Piet De Jong

Macquarie University - Department of Applied Finance and Actuarial Studies; Financial Research Network (FIRN); Macquarie University, Macquarie Business School

Geoffrey Loudon

Macquarie University

Weihao Choo

Macquarie University - Department of Applied Finance and Actuarial Studies

Date Written: February 15, 2016

Abstract

SRISK methodology recently proposed in the literature is refined and extended. The refinement is to define systemic risk using a formalised stress testing framework including a stress function. Baseline risk and the stress risk are in terms of the ordinary and stressed expectation. Stressed expectation is expectation computed under a hypothetical stress, modelled with the stress function and scenarios. Systemic stress is defined in terms of a stress function and systemic scenarios impacting on a number of firms or financial entities. Stress functions are chosen by the practitioner and typically exaggerate undesirable extreme outcomes. Properties and characterisations of stress and stress related quantities are displayed and explored. Application is made to the study of the stability of Australian banks using daily time series data.

Keywords: Capital shortfall, baseline risk, stress testing, stressed expectation, stress diversification

Suggested Citation

De Jong, Piet and Loudon, Geoffrey and Choo, Weihao, Monitoring Risk in the Financial System Using Time Series Methods (February 15, 2016). CIFR Paper No. 091/2016. Available at SSRN: https://ssrn.com/abstract=2732932 or http://dx.doi.org/10.2139/ssrn.2732932

Piet De Jong (Contact Author)

Macquarie University - Department of Applied Finance and Actuarial Studies ( email )

Sydney, New South Wales
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

Geoffrey Loudon

Macquarie University ( email )

New South Wales 2109
Australia

Weihao Choo

Macquarie University - Department of Applied Finance and Actuarial Studies ( email )

North Ryde
Sydney, New South Wales 2109
Australia

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