Scenario-Free Analysis of Financial Stability with Interacting Contagion Channels

J. Farmer, Alissa Kleinnijenhuis, Thom Wetzer and Garbrand Wiersema

INET Oxford Working Papers from Institute for New Economic Thinking at the Oxford Martin School, University of Oxford

Abstract: Currently financial stress test simulations that take into account multiple interacting contagion mechanisms are conditional on a specific, subjectively imposed stress-scenario. Eigenvalue-based approaches, in contrast, provide a scenario-independent measure of systemic stability, but only handle a single contagion mechanism. We develop an eigenvalue-based approach that gives the best of both worlds, allowing analysis of multiple, interacting contagion channels without the need to impose a subjective stress scenario. This allows us to demonstrate that the instability due to interacting channels can far exceed that of the sum of the individual channels acting alone. We derive an analytic formula in the limit of a large number of institutions that gives the instability threshold as a function of the relative size and intensity of contagion channels, providing valuable insights into financial stability whilst requiring very little data to be calibrated to real financial systems.

Keywords: Financial Stability; Systemic Risk; Interacting Contagion Channels; Financial Contagion; Multiplex Networks; Stress Test; Liquidity-Solvency Nexus (search for similar items in EconPapers)
JEL-codes: G01 G17 G18 G21 G23 G28 (search for similar items in EconPapers)
Pages: 104 pages
Date: 2020-01
New Economics Papers: this item is included in nep-cba, nep-hme, nep-net and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.inet.ox.ac.uk/files/SSRN-id3408533.pdf (application/pdf)

Related works:
Journal Article: Scenario-free analysis of financial stability with interacting contagion channels (2023)
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:amz:wpaper:2019-10

Access Statistics for this paper

More papers in INET Oxford Working Papers from Institute for New Economic Thinking at the Oxford Martin School, University of Oxford Contact information at EDIRC.
Bibliographic data for series maintained by INET Oxford admin team ().