[R-SIG-Finance] Systematic Risk to the Financial System, Economy

[Adams, Zeno]

David,

I have been recently working on this subject. It seems that the focus has shifted away from "systematic risks" and on to "systemic risk", i.e. the risk that one asset or financial institution in distress causes significant spillovers on other institutions and, perhaps on the entire market. I find the following papers worth reading and believe their methods to be implementable in R:

Brownlees, Christian T. and Engle, Robert F., Volatility, Correlation and Tails for Systemic Risk Measurement (June 1, 2011). Available at SSRN: http://ssrn.com/abstract=1611229

They also have a nice homepage on http://vlab.stern.nyu.edu/welcome/risk


Brunnermeier, K., and Adrian, T. (2011). "CoVaR" http://www.princeton.edu/~markus/research/papers/CoVaR.pdf
This paper is very well known among central bankers and policy makers


Adams, Z., Füss,R., and Gropp, R. (2011) "Modeling Spillover Effects among Financial Institutions: A State-Dependent-Sensitivity Value-at-Risk Approach" http://www.irmc.eu/public/files/Adams,Fuss,Gropp_Spillover%20effects%20among%20financial%20institutions.pdf


Acharya, Viral V., Pedersen, Lasse Heje, Philippon, Thomas and Richardson, Matthew P., Measuring Systemic Risk (May 2010). AFA 2011 Denver Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1573171

All methods described in these papers may be useful for measuring how close we are to a "doomsday" scenario. The papers also offer some guidance on legislative reforms that would be necessary to prevent big banks from creating systemic risk.

HTH

Zeno

-----Original Message-----
From: r-sig-finance-bounces at r-project.org [mailto:r-sig-finance-bounces at r-project.org] On Behalf Of David St John
Sent: Montag, 3. Oktober 2011 15:35
To: r-sig-finance at stat.math.ethz.ch
Subject: [R-SIG-Finance] Systematic Risk to the Financial System, Economy

Dear R-Fin Community,

Has there been any work done since the financial crisis in defining what are
the systematic risks to the financial system, and the economy as a whole, in
certain derivatives positions, securitizing mortgages, excessive leverage,
poor liquidity ala LTCM, etc?  Could I use R, hypothetically, to analyze
past data with respect to a basket of derivatives, to come up with some kind
of measure for how close we are to a 'doomsday' scenario, like a near total
market value meltdown of mortgage backed securities?

I would also very much appreciate anyone willing to message me off list to
explain what legislative or fed policy reforms, if any, could prevent big
banks from creating such risks.  What better perspective on this than an
insider's perspective?

Best,
-David

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