38 Pages Posted: 8 Feb 2017 Last revised: 28 May 2017
Date Written: May 26, 2017
We propose a theory-driven framework for monitoring system-wide risk. Our approach extends the one-firm Merton (1974) credit risk model to a generalized stochastic network-based framework across all financial institutions, comprising a novel approach to measuring systemic risk over time. We develop four desired properties for any systemic risk measure. We also develop measures for the risks created by each individual institution and a measure for risk created by each pairwise connection between institutions. Four specific implementation models are then explored, and brief empirical examples illustrate the ease of implementation of these four models and show general consistency between their results.
Keywords: systemic risk, networks, stochastic dynamics
Suggested Citation: Suggested Citation
Das, Sanjiv Ranjan and Kim, Seoyoung and Ostrov, Daniel N, Dynamic Systemic Risk Networks: A Note (May 26, 2017). Available at SSRN: https://ssrn.com/abstract=2913330