The Absorption Ratio as an Indicator for Macro-prudential Monitoring in Jamaica

Gordon, Leo-Rey (2015): The Absorption Ratio as an Indicator for Macro-prudential Monitoring in Jamaica. Published in: Bank of Jamaica Working Paper Series (2015)

Abstract

The systemic monitoring of the financial system often utilizes indices created from the aggregation of various financial and economic variables. This paper uses the principles components technique as an alternative to variable aggregation when creating a stability indicator for the Jamaica banking system. Based on this principal components approach, the paper: i) measures changes in the extent of common risk exposure over time ii) identifies periods in which this common exposure became a systemic concern iii) identifies systemically important institutions and sectors. The results demonstrate that Jamaica’s financial system has demonstrated varying periods in which common exposure was a systemic concern. During these periods there was varying contributions to common exposure by institutions but the foreign exchange and equity markets were identified as key market drivers.

• Item Type: MPRA Paper
• Language: English
• Keywords: Systemic Risk; Principal Components Analysis; Absorption Ratio
• Subjects: G - Financial Economics > G1 - General Financial Markets; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

Allen, F., & Gale, D. (2000). Financial Contagion. Journal of Political Economy, 108(1), 1-33.

Avanzini, D., & Jara, A. (2013). A PCA Approach to Common Risk Exposures in the Chilean Banking System. Central Bank of Chile.

Bernanke, B. (2011). Implementing a Macroprudential Approach to Supervision and Regulation. 47th Annual Congerence on Bank Structure and Competition. Chicago.

Billio, M., Getmansky, M., Lo, A., & Pelizzon, L. (2010). Measuring Systemic Risk in the Finance and Insurance Sectors. 4774(10).

Chen, Y. (1999). Banking Panis: The role of the first come, first served rule and information externalities. Journal of Political Economy, 105(5), 946-968.

De Bandt, O., & Hartmann, P. (2000). Systemic Risk: Asurvey. (35).

Ebrahim, S. (2000). Volatility Transmission Between Foreign Exchange and Money Markets. 2000(16).

Ehrman, M., Fratzscher, M., & Rigobon, R. (2011). Stocks, bonds, money markets and exchange rates; measuring international financial transmission. Journal of Applied Econometrics, 26(6), 948-974.

Granger, C. (1969, July). Investigating Causal Relations by Econometric Models and Cross-Spectral Methods. Econometrica, 424-438.

Hakkio, C., & Keeton, W. (2009). Financial Stress : what is it, how can it be measured, and why does it matter? Economic Review, 94(2), 5-50.

Hartmann, P., Straetmans, S., & G. De Vries, C. (2004). Asset Market Linkages in Crisis Periods. The Review of Economics and Statistics, 86(1), 313-326.

Hatzius, J., Hooper, P., Mishkin, F., Schoenholtz, K., & Watson, M. (2010). Financial Conditions Indexes: A Fresh Look After the Financial Crsis. NBER Working Paper Series(16150).

Hotelling, H. (1993). Analysis of complex and statistical variables into principal components. Journal of Educational Psychology, 24, 417-441.

Hurditt, P. (2004). An Assessment of Volatility Transmission in the Jamaican Financial System. Jounral of Business, Finance, and Economics in Emerging Economies, 1(1).

Joliffe, I. (2002). Principal Component Analysis. Springer Series in Statistics.

Kiyotaki, N., & Moore, J. (1997). Credit Cycles. Journal of Political Eocnomy, 105(2), 211-248.

Kritzman, M., Li, Y., Page, S., & Rigobon, R. (2010). Principal Components as a Measure of Systemic Risk. 4785(10).

Langrin, R. B. (2002). An Early Warning System for the Prevention of Banking Sector Crisis in Jamaica. Bank of Jamaica, Research and Economic Programming Division.

Lewis, J. (2006). An Early Warning Model of Bank Failure in Jamaica: An Information Theoretic Approach. Bank of Jamaica.

Milwood, T.-a. (2012). A composite Indicator of Systemic Stress: The Case of Jamaica.

Mingione, F. (2011). Forecasting with Principal Components Analysis: an application to. Bank of Jamaica, Financial Stability.

Morris, V. (2010). Measuring and Forecasting FInancial Stability: The Composition of an Aggregate Financial Stability Index for Jamaica.

Pearson, K. (1901). On lines and planes of closest fit to systems of points in space. The London, Edinburg, and Dublin Philosophical Magazine and Journal of Science, 2(11), 559-572.

Pericolo, M., & Sbracia, M. (2003). A primer on financial contagion. Jounral of Economic Surveys, 17(4), 571-608.

Reyngold, A., Shnyra, K., & Stein, R. (2013). Aggregate and firm-level measures of systemic. MIT LFE Working PAper(LFE-0501-13).

Rigobon, R., & Sack, B. (2003). Spillovers Across U.S Financial Markets. NBER Working Paper Series, 9640.

Rovai, A., Baker, J., & Ponton, M. (2013). Social Science Research Design and Statistics: A practictioners guide to research methods and SPSS analysis. Watertree Press.

Saunders, R. J. (1969, March). On the Interpretation of Models Explaining Cross Sectional Differences Among Commercial . The Journal of Financial and Quantitative Analysis, 4(1), 25-35.

Shiller, R., & Beltratti, A. (1990). Stock Prices and Bond Yields. Journal of Monetary Economics, 30, 25-46.

Shlens, J. (2014). A Tutorial on Principal Component Analysis. Google Research. Retrieved from http://arxiv.org/pdf/1404.1100v1

Wallace, C. (2013). Financial Stress and its Impact on Economic Activity: Evidence from Jamaica. Bank of Jamaica, Financial Stability.