Expected Duration as a Leading Index for Systemic Risk

Acuña, Guillermo (2014): Expected Duration as a Leading Index for Systemic Risk.

Abstract

This paper empirically analyzes the determinants of systemic risk using dynamic panel data regressions, because they allow controlling for unobserved heterogeneity and omitted variables, decreasing the bias in the coefficient estimates. Additionally, it analyzes the recurrence of high systemic risk events using a duration models approach, in which the time spent in a state of financial stability is probabilistically characterized, as well as the transition probability to an unstable state, in which systemic risk is high. Moreover, it suggests that the expected duration of financial stability can be used as a leading index for systemic risk.

• Item Type: MPRA Paper
• Language: English
• Keywords: Systemic Risk; Dynamic Panel; Duration Models
• Subjects: G - Financial Economics > G0 - General > G01 - Financial Crises; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

T. Adrian and M. K. Brunnermeier. Covar. Federal Reserve Bank of New York Staff Report, (348), 2009.

T. Adrian and H. S. Shin. Liquidity and leverage. Journal of Financial Intermediation, 19(3):418–437, 2010.

F. Allen and D. Gale. Financial contagion. Journal of Political Economy, 108(1), 2000.

J. D. Angrist and J.-S. Pischke. Mostly Harmless Econometrics: An Empiricist’s Companion. 2008.

M. Billio, M. Getmansky, A. W. Lo, and L. Pelizzon. Econometric measures of connectedness and systemic risk in the finance and insurance sectors. Journal of Financial Economics, 104(3):535–559, 2012.

M. Brunnermeier and Y. Sannikov. A macroeconomic model with a financial sector. Princeton University Working Paper, 2009.

M. K. Brunnermeier and L. H. Pedersen. Market liquidity and funding liquidity. Review of Financial Studies, 22(6):2201–2238, 2009.

A. C. Cameron and P. K. Trivedi. Microeconometrics: Methods and Applications. 2005.

J. A. Chan-Lau. Balance sheet network analysis of too-connected-to-fail risk in global and domestic banking systems. IMF Working Papers 10/107, International Monetary Fund, 2010.

J. A. Chan-Lau, M. Espinosa, K. Giesecke, and J. A. Sole. Assessing the systemic implications of financial linkages. IMF Global Financial Stability Report, 2, 2009.

X. Freixas, B. Parigi, and J. C. Rochet. Systemic risk, interbank relations and liquidity provision by the central bank. Journal of Money, Credit and Banking, 32(3), 2000.

C. Gauthier, A. Lehar, and M. Souissi. Macroprudential capital requirements and systemic risk. Journal of Financial Intermediation, 21(4):594–618, 2012.

G. Gorton. Banking panics and business cycles. Oxford Economic Papers, 40(4), 1988.

X. Huang, H. Zhou, and H. Zhu. Systemic risk contributions. Journal of Financial Services Research, 42(1):55–83, 2012.

N. M. Kiefer. Economic duration data and hazard functions. Journal of Economic Literature, 26(2), 1988.

R. Koenker and K. F. Hallock. Quantile regression. Journal of Economic Perspectives, 15(4):143–156, 2001.

E. Nier, J. Yang, T. Yorulmazer, and A. Alentorn. Network models and financial stability. Bank of England working papers 346, Bank of England, 2008.

M. Segoviano and C. Goodhart. Banking stability measures. IMF Working Papers, 2009.

G. H. Stern and R. J. Feldman. Too Big To Fail: The Hazards of Bank Bailouts. 2004.

C. Upper. Simulation methods to assess the danger of contagion in interbank markets. Journal of Financial Stability, 7(3):111–125, 2011.

A. Y.-T. Wong and T. P. W. Fong. Analysing interconnectivity among economies. Emerging Markets Review, 12(4):432–442, 2011.