Working paper

Systemic Financial Risk Inference in a Global Setting

30 Jun 2014
DOI

http://doi.org/10.4225/50/583e26963abc0
Description

We propose a new top-down approach to measure systemic risk in the financial system. Our framework uses a combination of macroeconomic, financial and rating factors in representative regions of the world. We formulate a mixed-frequency state-space model to estimate macroeconomic factors. To derive financial risk factors, we use Moody’s/KMV expected default frequencies after accounting for ratings of major financial institutions in the considered regions. The estimated factors are combined to derive probabilities for systemically relevant defaults in the financial industry. Regional macroeconomic factors are significant predictors of the existence and number of systemically important defaults, while regional financial risk and ratings factors are relevant for the existence only. For major events, global credit risk also matters.

Publication Details
Identifiers: 
DOI: 
10.4225/50/583e26963abc0
Published year only: 
2014
10
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