EconPapers    
Economics at your fingertips  
 

Banking systemic vulnerabilities: A tail-risk dynamic CIMDO approach

Xisong Jin and Francisco Nadal De Simone ()

Journal of Financial Stability, 2014, vol. 14, issue C, 81-101

Abstract: This study proposes a novel framework which combines marginal probabilities of default estimated from a structural credit risk model with the consistent information multivariate density optimization (CIMDO) methodology and the generalized dynamic factor model (GDFM) supplemented by a dynamic t-copula. The framework models banks’ default dependence explicitly and captures the time-varying non-linearities and feedback effects typical of financial markets. It measures banking systemic credit risk in the three forms categorized by the European Central Bank: (1) credit risk common to all banks; (2) credit risk in the banking system conditional on distress on a specific bank or combinations of banks; and (3) the buildup of banking system vulnerabilities over time which may unravel disorderly. In addition, the estimates of the common components of the banking sector short-term and conditional forward default measures contain early warning features, and the identification of their drivers is useful for macroprudential policy. Finally, the framework produces robust out-of-sample forecasts of the banking systemic credit risk measures. This paper advances the agenda of making macroprudential policy operational.

Keywords: Financial stability; Procyclicality; Macroprudential policy; Credit risk; Early warning indicators; Default probability; Non-linearities; Generalized dynamic factor model; Dynamic copulas; GARCH (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1572308913000983
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Banking Systemic Vulnerabilities: A Tail-risk Dynamic CIMDO Approach (2013) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:14:y:2014:i:c:p:81-101

DOI: 10.1016/j.jfs.2013.12.004

Access Statistics for this article

Journal of Financial Stability is currently edited by I. Hasan, W. C. Hunter and G. G. Kaufman

More articles in Journal of Financial Stability from Elsevier
Bibliographic data for series maintained by Nithya Sathishkumar ().

 
Page updated 2021-05-22
Handle: RePEc:eee:finsta:v:14:y:2014:i:c:p:81-101