Systemic Risk Modeling: How Theory Can Meet Statistics

40 Pages Posted: 20 Apr 2020

See all articles by Raphael Espinoza

Raphael Espinoza

International Monetary Fund (IMF)

Miguel Segoviano

London School of Economics & Political Science (LSE) - Financial Markets Group

Ji Yan

City University of Hong Kong (CityUHK) - Department of Economics & Finance

Date Written: March 2020

Abstract

We propose a framework to link empirical models of systemic risk to theoretical network/general equilibrium models used to understand the channels of transmission of systemicrisk. The theoretical model allows for systemic risk due to interbank counterpartyrisk, common asset exposures/fire sales, and a 'Minsky" cycle of optimism. The empiricalmodel uses stock market and CDS spreads data to estimate a multivariate density of equityreturns and to compute the expected equity return for each bank, conditional on a badmacro-outcome. Theses 'cross-sectional" moments are used to re-calibrate the theoreticalmodel and estimate the importance of the Minsky cycle of optimism in driving systemicrisk.

Keywords: Financial crises, Bank credit, Financial markets, Financial institutions, Macroprudential policies and financial stability, Systemic risk, Minsky effect, CIMDO, Default, WP, interbank, repayment rate, expected shortfall, time t, Minsky

JEL Classification: C14, G17, G21, G32, E01, E52, F16, E63

Suggested Citation

Espinoza, Raphael and Segoviano, Miguel and Yan, Ji, Systemic Risk Modeling: How Theory Can Meet Statistics (March 2020). IMF Working Paper No. 20/54, Available at SSRN: https://ssrn.com/abstract=3579674

Raphael Espinoza (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Miguel Segoviano

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Ji Yan

City University of Hong Kong (CityUHK) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

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