The reciprocal relationship between systemic risk and real economic activity

The contribution of this paper to the literature is three-fold: (1) it empirically uncovers the directionality and persistence of systemic risk surrounding "the great recession"; (2) it quantifies the reaction of the macro-economy to financial (banking) system shocks; and (3) it unearths feedback effects from the macro-economy to the (in)stability of a banking system. These contributions are attained by looking at the extremal dependence structure among banks, by presenting a multivariate framework for identifying and modeling their joint-tail distributions, and by constructing an aggregate system-wide distress index, a risk-stability index, which quantifies the systemic risk of a bank.Persistence, distress, contagion, panel VAR

How Does Financial Openness Affect Economic Growth and its Components?

This paper aims at uncovering the different channels through which de facto financial openness affects economic growth and its components. The results herein indicate that de facto measures of financial openness (as proxied by different types of capital inflows) stimulate economic growth. In particular, the results indicate that higher levels of FDI inflows stimulate GDP per worker growth and crowd-in domestic investment for developing and emerging markets. As far as developed economies, I find that higher levels of both FDI and Portfolio-type inflows improve GDP per worker growth, but that only the latter type of capital stimulates capital accumulation with crowding-in effects. The one similarity between developed and developing economies is that FDI positively affects total factor productivity in both cases.Capital account liberalization, capital flows, dynamic panels, foreign direct investment, total factor productivity

Averting Currency Crises: The Pros and Cons of Financial Openness

We identify the benefits and costs of financial openness in terms of currency crises based on a novel quantification of the systemic impact of currency (financial) crises. We find that systemic currency crises mainly exist regionally, and that financial openness helps diminish the probability of a currency crisis after controlling for their systemic impact. To clarify further the effect of financial openness, we decompose it into the various types of capital inflows. We find that the reduction of the probability of a currency crisis depends on the type of capital and on the region. Finally yet importantly, we find that monetary policy geared towards price stability, through a flexible inflation target that takes into account systemic impact, reduces the probability of a currency crisis.Exchange market pressure, systemic risk, capital flows

Can Financial Openness Help Avoid Currency Crises?

By introducing the concept of conditional probability of joint failure (CPJF), and by proposing a new measure for the systemic impact of currency crises, we provide new insights into the different sources of currency crises. We conclude that financial openness helps to diminish the probability of a currency crisis even after controlling for the onset of a banking crisis, that systemic currency crises mainly exist regionally, and that monetary policy geared towards price stability reduces the probability of a currency crisis.Systemic Crises, Systemic Impact, Exchange Market Pressure, Extreme Value Theory, Financial Openness.

Risk-Factor Portfolios and Financial Stability

This paper defines a risk-stability index (RSI) that takes into account the extreme dependence structure and the conditional probability of joint failure (CPJF) among risk factors in a portfolio. In combination, both the RSI and CPJF provide a valuable tool for analyzing risk from complementary perspectives; thereby allowing the measurement of (i) common distress of risk factors in a portfolio, (ii) distress between specific risk factors, and (iii) distress to a portfolio related to a specific risk factor. With an application to a financial system comprised of 18 banks from around the world, the results herein show that financial stability must be viewed as a continuum, since risk varies from period to period. The risk-stability index indicates that U.S. banks tend to cause the most stress to the global financial system (as defined herein), followed by Asian and European banks. The results also show that Asian banks seem to experience the most persistence of distress, followed by U.S. and European banks. The panel VAR results show that monetary policy should "lean against the wind", since it has a significant effect in reducing the (potential) instability of a financial system

Risk-Factor Portfolios and Financial Stability

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

How Does Financial Openness Affect Economic Growth and its Components?

This paper aims at uncovering the different channels through which de facto financial openness affects economic growth and its components. The results herein indicate that de facto measures of financial openness (as proxied by different types of capital inflows) stimulate economic growth. In particular, the results indicate that higher levels of FDI inflows stimulate GDP per worker growth and crowd-in domestic investment for developing and emerging markets. As far as developed economies, I find that higher levels of both FDI and Portfolio-type inflows improve GDP per worker growth, but that only the latter type of capital stimulates capital accumulation with crowding-in effects. The one similarity between developed and developing economies is that FDI positively affects total factor productivity in both cases

An Inquiry into Banking Portfolios and Financial Stability Surrounding "The Great Recession"

By utilizing the extreme dependence structure and the conditional probability of joint failure (CPJF) between banks, this paper characterizes a risk-stability index (RSI) that quantifies (i) common distress of banks, (ii) distress between specific banks, and (iii) distress to a portfolio related to a specific bank. The results show that financial stability is a continuum; that the Korean and U.S. banking systems seem more prone to systemic risk; and that Asian banks experience the most persistence of distress. Furthermore, a panel VAR indicates that "leaning against the wind" reduces the instability of a financial system

The reciprocal relationship between systemic risk and real economic activity

The contribution of this paper to the literature is three-fold: (1) it empirically uncovers the directionality and persistence of systemic risk surrounding "the great recession"; (2) it quantifies the reaction of the macro-economy to financial (banking) system shocks; and (3) it unearths feedback effects from the macro-economy to the (in)stability of a banking system. These contributions are attained by looking at the extremal dependence structure among banks, by presenting a multivariate framework for identifying and modeling their joint-tail distributions, and by constructing an aggregate system-wide distress index, a risk-stability index, which quantifies the systemic risk of a bank

How Does Financial Openness Affect Economic Growth and its Components?

This paper aims at uncovering the different channels through which de facto financial openness affects economic growth and its components. The results herein indicate that de facto measures of financial openness (as proxied by different types of capital inflows) stimulate economic growth. In particular, the results indicate that higher levels of FDI inflows stimulate GDP per worker growth and crowd-in domestic investment for developing and emerging markets. As far as developed economies, I find that higher levels of both FDI and Portfolio-type inflows improve GDP per worker growth, but that only the latter type of capital stimulates capital accumulation with crowding-in effects. The one similarity between developed and developing economies is that FDI positively affects total factor productivity in both cases