Systemic Risk with Exchangeable Contagion: Application to the European Banking System

Umberto Cherubini and Sabrina Mulinacci

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Abstract: We propose a model and an estimation technique to distinguish systemic risk and contagion in credit risk. The main idea is to assume, for a set of $d$ obligors, a set of $d$ idiosyncratic shocks and a shock that triggers the default of all them. All shocks are assumed to be linked by a dependence relationship, that in this paper is assumed to be exchangeable and Archimedean. This approach is able to encompass both systemic risk and contagion, with the Marshall-Olkin pure systemic risk model and the Archimedean contagion model as extreme cases. Moreover, we show that assuming an affine structure for the intensities of idiosyncratic and systemic shocks and a Gumbel copula, the approach delivers a complete multivariate distribution with exponential marginal distributions. The model can be estimated by applying a moment matching procedure to the bivariate marginals. We also provide an easy visual check of the good specification of the model. The model is applied to a selected sample of banks for 8 European countries, assuming a common shock for every country. The model is found to be well specified for 4 of the 8 countries. We also provide the theoretical extension of the model to the non-exchangeable case and we suggest possible avenues of research for the estimation.

Date: 2015-02
New Economics Papers: this item is included in nep-ban, nep-ecm and nep-rmg
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1502.01918

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