 Extreme Value Theory with an Application to Bank Failures through ContagionRashid Nikzad and David McDonald Journal of Applied Finance & Banking, 2017, vol. 7, issue 3, 6 Abstract: This study attempts to quantify the shocks to a banking network and analyze the transfer of shocks through the network. We consider two sources of shocks: external shocks due to market and macroeconomic factors which impact the entire banking system, and idiosyncratic shocks due to failure of a single bank. The external shocks we considered in this study are due to exchange rate shocks. An ARMA/GARCH model is used to extract i.i.d. residuals for this purpose. The effect of external shocks will be estimated by using two methods: (i) bootstrap simulation of the time series of shocks that occurred to the banking system in the past, and (ii) using the extreme value theory (EVT) to model the tail part of the shocks. In the next step, the probability of the failure of banks in the system is studied by using the Monte Carlo simulation. We also introduce the importance sampling technique in the EVT modeling to increase the probability of failure in the simulation. We calibrate the model such that the network resembles the Canadian banking system.JEL classification numbers: G2, C1Keywords: Monte Carlo Simulation; Extreme Value Theory; GARCH; Importance Sampling; Bank Contagion Date: 2017 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:spt:apfiba:v:7:y:2017:i:3:f:7_3_6 Access Statistics for this article More articles in Journal of Applied Finance & Banking from SCIENPRESS Ltd |
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