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Systemic Greeks: Measuring risk in financial networks

Nils Bertschinger and Julian Stobbe

Papers from arXiv.org

Abstract: Since the latest financial crisis, the idea of systemic risk has received considerable interest. In particular, contagion effects arising from cross-holdings between interconnected financial firms have been studied extensively. Drawing inspiration from the field of complex networks, these attempts are largely unaware of models and theories for credit risk of individual firms. Here, we note that recent network valuation models extend the seminal structural risk model of Merton (1974). Furthermore, we formally compute sensitivities to various risk factors -- commonly known as Greeks -- in a network context. In particular, we propose the network $\Delta$ as a quantitative measure of systemic risk and illustrate our findings on some numerical examples.

New Economics Papers: this item is included in nep-rmg
Date: 2018-10
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