Risk-Factor Portfolios and Financial Stability

Garita, Gus (2009): Risk-Factor Portfolios and Financial Stability.

Abstract

By utilizing the extreme dependence structure and the conditional probability of joint failure (CPJF) among risk factors, this paper defines a risk-stability index (RSI) that quantifies (i) common distress of risk factors, (ii) distress between specific risk factors, and (iii) distress to a portfolio related to a specific risk factor. The results show that financial stability is a continuum; that U.S. banks tend to cause the most stress to the global financial system (as defined herein); and that Asian banks show the most persistence of distress. Further, the panel VAR indicates that "leaning against the wind" reduces the (potential) instability of a financial system.

• Item Type: MPRA Paper
• Language: English
• Keywords: Conditional probability of joint failure, contagion, dependence structure, distress, multivariate extreme value theory, panel VAR, persistence
• Subjects: F - International Economics > F1 - Trade > F15 - Economic Integration; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C10 - General; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration

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