A framework for assessing the systemic risk of major financial institutions

By Xin Huang, Hao Zhou, Haibin Zhu. 2009

678 citations recorded by the source corpus.

In this paper we propose a framework for measuring and stress testing the systemic risk of a group of major financial institutions. The systemic risk is measured by the price of insurance against financial distress, which is based on ex ante measures of default probabilities of individual banks and forecasted asset return correlations. Importantly, using realized correlations estimated from high-frequency equity return data can significantly improve the accuracy of forecasted correlations. Our stress testing methodology, using an integrated micro-macro model, takes into account dynamic linkages between the health of major U.S. banks and macrofinancial conditions. Our results suggest that the theoretical insurance premium that would be charged to protect against losses that equal or exceed 15 percent of total liabilities of 12 major U.S. financial firms stood at $110 billion in March 2008 and had a projected upper bound of $250 billion in July 2008.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/f80fee41d1c4715f3678ea7158ab3941762c6e6f

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

1. Andrew J. Patton
2. D. Oh
3. Hao Zhou
4. Xin Huang
5. Haibin Zhu
6. Robert F. Engle
7. J. Chan-Lau
8. Tim Bollerslev

In Finance

1. Andrew J. Patton
2. Hao Zhou
3. D. Oh
4. Robert F. Engle
5. Xin Huang
6. Haibin Zhu
7. Tim Bollerslev
8. J. Chan-Lau

Citations in the corpus

• Testing Macroprudential Stress Tests: The Risk of Regulatory Risk Weights (2014, positive): “…assumptions on revenues cover the stressed losses.7 The profits are then reported in the 5The Marginal Expected Shortfall (MES) of Acharya et al. (2010b), the CoVaR of Adrian and Brunnermeier (2010), and the marginal contribution to the Distress Insurance Premium (DIP) of Huang et al. (2009).”
• Extreme risk spillover network: application to financial institutions (2017, background): “For example, using credit default swap (CDS) spreads of financial institutions and equity return correlations across these financial institutions, Huang et al. (2009) measure systemic risk by the price of insurance against financial distress.”
• Systemic Risk Measures: The Simpler the Better? (2013, background): “reason is that the measure of Huang et al. (2009) is based on a non-existent product and”
• Time-Varying Systemic Risk: Evidence From a Dynamic Copula Model of CDS Spreads (2018, methodology): “Stöber and Czado (2012) also used vine copulas, combined with a regime-switching model for dynamics, to model dependence between 10 German stock returns.”
• How Does Bank Competition Affect Systemic Stability (2012, neutral): “6 See Adrian and Brunnermeier (2009), Huang, Zhou, and Zhu (2009), Chan-Lau and Gravelle (2005), Avesani, Pascual, and Li (2006), and Elsinger, Lehar and Summer (2005).”