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Assessing systemic risk due to fire sales spillover through maximum entropy network reconstruction

Domenico Di Gangi, Fabrizio Lillo and Davide Pirino ()

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Abstract: Assessing systemic risk in financial markets is of great importance but it often requires data that are unavailable or available at a very low frequency. For this reason, systemic risk assessment with partial information is potentially very useful for regulators and other stakeholders. In this paper we consider systemic risk due to fire sales spillover and portfolio rebalancing by using the risk metrics defined by Greenwood et al. (2015). By using the Maximum Entropy principle we propose a method to assess aggregated and single bank's systemicness and vulnerability and to statistically test for a change in these variables when only the information on the size of each bank and the capitalization of the investment assets are available. We prove the effectiveness of our method on 2001-2013 quarterly data of US banks for which portfolio composition is available.

New Economics Papers: this item is included in nep-ban and nep-rmg
Date: 2015-09, Revised 2018-07
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