166,041 research outputs found
Entangling credit and funding shocks in interbank markets
Credit and liquidity risks represent main channels of financial contagion for
interbank lending markets. On one hand, banks face potential losses whenever
their counterparties are under distress and thus unable to fulfill their
obligations. On the other hand, solvency constraints may force banks to recover
lost fundings by selling their illiquid assets, resulting in effective losses
in the presence of fire sales - that is, when funding shortcomings are
widespread over the market. Because of the complex structure of the network of
interbank exposures, these losses reverberate among banks and eventually get
amplified, with potentially catastrophic consequences for the whole financial
system. Building on Debt Rank [Battiston et al., 2012], in this work we define
a systemic risk metric that estimates the potential amplification of losses in
interbank markets accounting for both credit and liquidity contagion channels:
the Debt-Solvency Rank. We implement this framework on a dataset of 183
European banks that were publicly traded between 2004 and 2013, showing indeed
that liquidity spillovers substantially increase systemic risk, and thus cannot
be neglected in stress-test scenarios. We also provide additional evidence that
the interbank market was extremely fragile up to the 2008 financial crisis,
becoming slightly more robust only afterwards
Community analysis of global financial markets
We analyze the daily returns of stock market indices and currencies of 56 countries over the period of 2002â2012. We build a network model consisting of two layers, one being the stock market indices and the other the foreign exchange markets. Synchronous and lagged correlations are used as measures of connectivity and causality among different parts of the global economic system for two different time intervals: non-crisis (2002â2006) and crisis (2007â2012) periods. We study community formations within the network to understand the influences and vulnerabilities of specific countries or groups of countries. We observe different behavior of the cross correlations and communities for crisis vs. non-crisis periods. For example, the overall correlation of stock markets increases during crisis while the overall correlation in the foreign exchange market and the correlation between stock and foreign exchange markets decrease, which leads to different community structures. We observe that the euro, while being central during the relatively calm period, loses its dominant role during crisis. Furthermore we discover that the troubled Eurozone countries, Portugal, Italy, Greece and Spain, form their own cluster during the crisis period.Published versio
DebtRank: A microscopic foundation for shock propagation
The DebtRank algorithm has been increasingly investigated as a method to
estimate the impact of shocks in financial networks, as it overcomes the
limitations of the traditional default-cascade approaches. Here we formulate a
dynamical "microscopic" theory of instability for financial networks by
iterating balance sheet identities of individual banks and by assuming a simple
rule for the transfer of shocks from borrowers to lenders. By doing so, we
generalise the DebtRank formulation, both providing an interpretation of the
effective dynamics in terms of basic accounting principles and preventing the
underestimation of losses on certain network topologies. Depending on the
structure of the interbank leverage matrix the dynamics is either stable, in
which case the asymptotic state can be computed analytically, or unstable,
meaning that at least one bank will default. We apply this framework to a
dataset of the top listed European banks in the period 2008 - 2013. We find
that network effects can generate an amplification of exogenous shocks of a
factor ranging between three (in normal periods) and six (during the crisis)
when we stress the system with a 0.5% shock on external (i.e. non-interbank)
assets for all banks.Comment: 10 pages, 2 figure
Recommended from our members
New Models of Public Ownership in Energy
This paper discusses some of the new and continuing ways in which the public sector is involved in the electricity / energy sector around the world. This involvement continues to be significant in spite of the longrunning trend towards privatisation, competition and independent regulation in the energy sector. We discuss why the theoretical case for public ownership might be more attractive now than in the recent past. We then discuss six case studies of modern public ownership drawn from the UK (Great Britain and Northern Ireland), Denmark, New Zealand, Finland and Chile. The investments covered include wind and nuclear power, LNG facilities, electricity and gas distribution investments and energy service companies for combined heat and power. We conclude with some outstanding questions raised by the apparently favourable conditions for increased public involvement in energy.ESR
- âŚ