scholarly journals SYSTEMIC RISK: AN ASYMPTOTIC EVALUATION

2017 ◽  
Vol 48 (02) ◽  
pp. 673-698 ◽  
Author(s):  
Alexandru V. Asimit ◽  
Jinzhu Li
Keyword(s):  
Systemic Risk ◽  
Financial Distress ◽  
Mathematical Formulation ◽  
Tail Dependence ◽  
Value Theory ◽  
Asymptotic Independence ◽  
Regulatory Capital ◽  
Asymptotic Dependence ◽  
Asymptotic Evaluation ◽  
Mathematical Definitions

AbstractSystemic risk (SR) has been shown to play an important role in explaining the financial turmoils in the last several decades and understanding this source of risk has been a particular interest amongst academics, practitioners and regulators. The precise mathematical formulation of SR is still scrutinised, but the main purpose is to evaluate the financial distress of a system as a result of the failure of one component of the financial system in question. Many of the mathematical definitions of SR are based on evaluating expectations in extreme regions and therefore, Extreme Value Theory (EVT) represents the key ingredient in producing valuable estimates of SR and even its decomposition per individual components of the entire system. Without doubt, the prescribed dependence model amongst the system components has a major impact over our asymptotic approximations. Thus, this paper considers various well-known dependence models in the EVT literature that allow us to generate SR estimates. Our findings reveal that SR has a significant impact under asymptotic dependence, while weak tail dependence, known as asymptotic independence, produces an insignificant loss over the regulatory capital.

scholarly journals An Analysis of a Heuristic Procedure to Evaluate Tail (in)dependence

2014 ◽  
Vol 2014 ◽  
pp. 1-15
Author(s):  
Marta Ferreira ◽  
Sérgio Silva
Keyword(s):  
Applied Sciences ◽  
Extreme Events ◽  
Tail Dependence ◽  
Extreme Value ◽  
Asymptotic Independence ◽  
Heuristic Procedure ◽  
Asymptotic Dependence ◽  
Simulation Based ◽  
Tail Dependence Coefficient

Measuring tail dependence is an important issue in many applied sciences in order to quantify the risk of simultaneous extreme events. A usual measure is given by the tail dependence coefficient. The characteristics of events behave quite differently as these become more extreme, whereas we are in the class of asymptotic dependence or in the class of asymptotic independence. The literature has emphasized the asymptotic dependent class but wrongly infers that tail dependence will result in the overestimation of extreme value dependence and consequently of the risk. In this paper we analyze this issue through simulation based on a heuristic procedure.

scholarly journals Hoeffding–Sobol decomposition of homogeneous co-survival functions: from Choquet representation to extreme value theory application

2021 ◽  
Vol 9 (1) ◽  
pp. 179-198
Author(s):  
Cécile Mercadier ◽  
Paul Ressel
Keyword(s):  
Random Vector ◽  
Extreme Value Theory ◽  
Tail Dependence ◽  
Value Theory ◽  
Extreme Value ◽  
Survival Functions ◽  
Main Ingredient ◽  
Asymptotic Dependence ◽  
Dependence Function ◽  
Theory Application

Abstract The paper investigates the Hoeffding–Sobol decomposition of homogeneous co-survival functions. For this class, the Choquet representation is transferred to the terms of the functional decomposition, and in addition to their individual variances, or to the superset combinations of those. The domain of integration in the resulting formulae is reduced in comparison with the already known expressions. When the function under study is the stable tail dependence function of a random vector, ranking these superset indices corresponds to clustering the components of the random vector with respect to their asymptotic dependence. Their Choquet representation is the main ingredient in deriving a sharp upper bound for the quantities involved in the tail dependograph, a graph in extreme value theory that summarizes asymptotic dependence.

Diversifying systemic risk in agriculture

2016 ◽  
Vol 76 (4) ◽  
pp. 512-531 ◽  
Author(s):  
Xiaoguang Feng ◽  
Dermot Hayes
Keyword(s):  
Crop Yield ◽  
Systemic Risk ◽  
Crop Insurance ◽  
Tail Dependence ◽  
Model Potential ◽  
High Dimensional ◽  
Computationally Efficient ◽  
Content Type ◽  
Insurance Portfolio ◽  
Systemic Nature

Purpose Portfolio risk in crop insurance due to the systemic nature of crop yield losses has inhibited the development of private crop insurance markets. Government subsidy or reinsurance has therefore been used to support crop insurance programs. The purpose of this paper is to investigate the possibility of converting systemic crop yield risk into “poolable” risk. Specifically, this study examines whether it is possible to remove the co-movement as well as tail dependence of crop yield variables by enlarging the risk pool across different crops and countries. Design/methodology/approach Hierarchical Kendall copula (HKC) models are used to model potential non-linear correlations of the high-dimensional crop yield variables. A Bayesian estimation approach is applied to account for estimation risk in the copula parameters. A synthetic insurance portfolio is used to evaluate the systemic risk and diversification effect. Findings The results indicate that the systemic nature – both positive correlation and lower tail dependence – of crop yield risks can be eliminated by combining crop insurance policies across crops and countries. Originality/value The study applies the HKC in the context of agricultural risks. Compared to other advanced copulas, the HKC achieves both flexibility and parsimony. The flexibility of the HKC makes it appropriate to precisely represent various correlation structures of crop yield risks while the parsimony makes it computationally efficient in modeling high-dimensional correlation structure.

scholarly journals Multivariate Extreme Value Theory - A Tutorial with Applications to Hydrology and Meteorology

2014 ◽  
Vol 2 (1) ◽  
Author(s):  
Anne Dutfoy ◽  
Sylvie Parey ◽  
Nicolas Roche
Keyword(s):  
Extreme Value Theory ◽  
High Speed ◽  
Value Theory ◽  
Extreme Value ◽  
Asymptotic Independence ◽  
Data Sets ◽  
Overhead Lines ◽  
Multivariate Extreme Value Theory ◽  
Air Temperatures ◽  
Multivariate Extreme Value

AbstractIn this paper, we provide a tutorial on multivariate extreme value methods which allows to estimate the risk associated with rare events occurring jointly. We draw particular attention to issues related to extremal dependence and we insist on the asymptotic independence feature. We apply the multivariate extreme value theory on two data sets related to hydrology and meteorology: first, the joint flooding of two rivers, which puts at risk the facilities lying downstream the confluence; then the joint occurrence of high speed wind and low air temperatures, which might affect overhead lines.

scholarly journals Macroprudential Policy in a Heterogeneous Environment—An Application of Agent-Based Approach in Systemic Risk Modelling

Entropy ◽  
2020 ◽  
Vol 22 (2) ◽  
pp. 129
Author(s):  
Jagoda Kaszowska-Mojsa ◽  
Mateusz Pipień
Keyword(s):  
Systemic Risk ◽  
Financial Distress ◽  
Dynamic Stochastic General Equilibrium ◽  
Macroprudential Policy ◽  
Risk Modelling ◽  
Agent Based ◽  
Macroprudential Policies ◽  
Dynamic Stochastic ◽  
Rbc Models ◽  
The Impact

Assessment of welfare effects of macroprudential policy seems the most important application of the Dynamic Stochastic General Equilibrium (DSGE) framework of macro-modelling. In particular, the DSGE-3D model, with three layers of default (3D), was developed and used by the European Systemic Risk Board and European Central Bank as a reference tool to formally model the financial cycle as well as to analyze effects of macroprudential policies. Despite the extreme importance of incorporating financial constraints in Real Business Cycle (RBC) models, the resulting DSGE-3D construct still embraces the representative agent idea, making serious analyses of diversity of economic entities impossible. In this paper, we present an alternative to DSGE modelling that seriously departs from the assumption of the representativeness of agents. Within an Agent Based Modelling (ABM) framework, we build an environment suitable for performing counterfactual simulations of the impact of macroprudential policy on the economy, financial system and society. We contribute to the existing literature by presenting an ABM model with broad insight into heterogeneity of agents. We show the stabilizing effects of macroprudential policies in the case of economic or financial distress.

scholarly journals Measuring Systemic Risk: Common Factor Exposures and Tail Dependence Effects

2015 ◽  
Vol 21 (5) ◽  
pp. 833-866
Author(s):  
Wan-Chien Chiu ◽  
Juan Ignacio Peña ◽  
Chih-Wei Wang
Keyword(s):  
Systemic Risk ◽  
Common Factor ◽  
Tail Dependence

scholarly journals The Application of Macroprudential Capital Requirements in Managing Systemic Risk

Complexity ◽  
2018 ◽  
Vol 2018 ◽  
pp. 1-15
Author(s):  
Hong Fan ◽  
Chirongo Moses Keregero ◽  
Qianqian Gao
Keyword(s):  
Systemic Risk ◽  
Financial Stability ◽  
Banking System ◽  
Capital Requirements ◽  
Equity Capital ◽  
Risk Allocation ◽  
Regulatory Capital ◽  
Allocation Mechanism ◽  
Bank Equity ◽  
Almost All

When setting banks regulatory capital requirement based on their contribution to the overall risk of the banking system we need to consider that the risk of the banking system as well as each banks risk contribution changes once bank equity capital gets redistributed. Therefore the present paper provides a theoretical framework to manage the systemic risk of the banking system in Nigeria based on macroprudential capital requirements, which requires banks to hold capital that is proportional to their contribution to systemic risk. Using a sample of 10 Nigerian banks, we reallocate capital in the system based on two scenarios; firstly in the situation where the system shocks do not exist in the system, we find that almost all banks appear to hold more capital; secondly, we also consider the situation where the system shocks exist in the system; we find that almost all banks tend to hold little capital on four risk allocation mechanisms. We further find that despite the heterogeneity in macroprudential capital requirements, all risk allocation mechanisms bring a substantial decrease in the systemic risk. The risk allocation mechanism based on ΔCoVaR decreases the average default probability the most. Our results suggest that financial stability can be substantially improved by implementing macroprudential regulations for the banking system.

scholarly journals Dynamic Time Warping Algorithm in Modeling Systemic Risk in the European Insurance Sector

Entropy ◽  
2021 ◽  
Vol 23 (8) ◽  
pp. 1022
Author(s):  
Anna Denkowska ◽  
Stanisław Wanat
Keyword(s):  
Systemic Risk ◽  
Dynamic Time Warping ◽  
Spanning Trees ◽  
Tail Dependence ◽  
Risk Identification ◽  
Insurance Companies ◽  
Time Warping ◽  
Insurance Sector ◽  
Dynamic Time ◽  
European Insurance

We are looking for tools to identify, model, and measure systemic risk in the insurance sector. To this aim, we investigated the possibilities of using the Dynamic Time Warping (DTW) algorithm in two ways. The first way of using DTW is to assess the suitability of the Minimum Spanning Trees’ (MST) topological indicators, which were constructed based on the tail dependence coefficients determined by the copula-DCC-GARCH model in order to establish the links between insurance companies in the context of potential shock contagion. The second way consists of using the DTW algorithm to group institutions by the similarity of their contribution to systemic risk, as expressed by DeltaCoVaR, in the periods distinguished. For the crises and the normal states identified during the period 2005–2019 in Europe, we analyzed the similarity of the time series of the topological indicators of MST, constructed for 38 European insurance institutions. The results obtained confirm the effectiveness of MST topological indicators for systemic risk identification and the evaluation of indirect links between insurance institutions.

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