Quotation Sigmund, Michael. 2017. Can bank-specific variables predict contagion effects? Quantitative Finance. 17 (12), 1805-1832.


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Abstract

Assessing the systemic risk a bank poses to the system has become a central part in regulating its capital requirements (e.g. the buffer for global or domestic systemically important banks). As with conventional risk types, systemic risks need to be quantified. Currently, global regulators propose a range of bank-specific indicators that measure size and interconnectedness to proxy systemic risk. In this study, we gauge the capacity of such indicators to explain contagion losses triggered by realizations of sizeable idiosyncratic shocks. We study contagion impact through different channels, separating these effects into first-round, nth-round, asset fire sale and mark-to-market losses. We evaluate the predictive power of models selected by best-subset selection and Lasso by applying 10-fold panel cross validation. We provide constructive proofs for the existence of clearing payment vectors and associated market equilibria for these contagion channels in a model of interlinked balance sheets. We provide algorithms that converge to the greatest market equilibrium in a finite number of steps. Our empirical results suggest that the Basel III indicator set performs well in comparison to alternative data-sets of bank-specific indicators. We also find, however, that the proposed data-sets without bank dummies do not perform well in capturing the relevance of the average network position for predicting contagion effects.

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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Journal article
Journal Quantitative Finance
Citation Index SSCI
WU-Journal-Rating new FIN-A, STRAT-B, VW-C, WH-B
Language English
Title Can bank-specific variables predict contagion effects?
Volume 17
Number 12
Year 2017
Page from 1805
Page to 1832
Reviewed? Y
URL https://www.tandfonline.com/doi/abs/10.1080/14697688.2017.1357974
DOI http://dx.doi.org/10.1080/14697688.2017.1357974
Open Access N

Associations

People
Sigmund, Michael (Former researcher)
Organization
Department of Economics (Berger) (Details)
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