Monitoring indirect contagion

Rama Cont and Eric Schaanning

Journal of Banking & Finance, 2019, vol. 104, issue C, 85-102

Abstract: We propose two indicators for quantifying the potential exposure of financial institutions to indirect contagion arising from deleveraging of assets in stress scenarios. The first indicator, the Endogenous Risk Index (ERI) captures spillovers across portfolios arising from deleveraging in stress scenarios. The second indicator, the Indirect Contagion Index (ICI) measures the systemic importance of a bank by quantifying the loss its distressed liquidation would inflict on other institutions. Both are computable from portfolio holdings of financial institutions and measures of market depth for the assets held in the portfolio. We discuss the micro-foundation of these indicators and apply them to the analysis of the vulnerability of the European banking system to indirect contagion.

Keywords: Financial stability; Price-mediated contagion; Macro prudential regulation; Systemic risk measurement (search for similar items in EconPapers)
JEL-codes: C63 E58 G17 G18 G28 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (42)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:104:y:2019:i:c:p:85-102

DOI: 10.1016/j.jbankfin.2019.04.007

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