Economics at your fingertips  

CoRisk: measuring systemic risk through default probability contagion

Paolo Giudici () and Laura Parisi ()

No 116, DEM Working Papers Series from University of Pavia, Department of Economics and Management

Abstract: We propose a novel systemic risk measurement model, based on stochastic processes, correlation networks and conditional probabilities of default.For each country we consider three different spread measures, one for each sector of the economy (sovereigns, corporates, banks), and we model each of them as a linear combination of two stochastic processes: a country-specific idiosyncratic component and a common systematic factor. We then build a partial correlation network model, and by combining it with the spread measures we derive the conditional default probabilities of each sector. Comparing them with the unconditional ones, we obtain the CoRisk, which measures the variation in the probability of default due to contagion effects. Our measurement model is applied to understand the time evolution of systemic risk in the economies of the European monetary union, in the recent period. The results show that, overall, the sovereign crisis has increased systemic risks more than the financial crisis. In addition, peripheral countries turn out to be exporters, rather than importers of systemic risk, and, conversely, core countries.

Keywords: correlation networks; default probabilities; systemic risk; stochastic processes (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec and nep-rmg
Date: 2016-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link) (application/pdf)

Related works:
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:

Access Statistics for this paper

More papers in DEM Working Papers Series from University of Pavia, Department of Economics and Management Contact information at EDIRC.
Bibliographic data for series maintained by Alice Albonico (). This e-mail address is bad, please contact .

Page updated 2019-04-14
Handle: RePEc:pav:demwpp:demwp0116