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Handbook on Systemic Risk

Book Description

The Handbook on Systemic Risk, written by experts in the field, provides researchers with an introduction to the multifaceted aspects of systemic risks facing the global financial markets. The Handbook explores the multidisciplinary approaches to analyzing this risk, the data requirements for further research, and the recommendations being made to avert financial crisis. The Handbook is designed to encourage new researchers to investigate a topic with immense societal implications as well as to provide, for those already actively involved within their own academic discipline, an introduction to the research being undertaken in other disciplines. Each chapter in the Handbook will provide researchers with a superior introduction to the field and with references to more advanced research articles. It is the hope of the editors that this Handbook will stimulate greater interdisciplinary academic research on the critically important topic of systemic risk in the global financial markets.

Table of Contents

  1. Cover
  2. Handbook on Systemic Risk
  3. Title page
  4. Copyright page
  5. Contributors
  6. Introduction
  7. PART I: DATA: THE PREREQUISITE FOR MANAGING SYSTEMIC RISK
    1. Data for Systemic Risk
    2. 1 Systemic Risk Information Requirements: Current Environment, Needs, and Approaches for Development
      1. 1.1 Introduction
      2. 1.2 Purpose
      3. 1.3 Overview of types of systemic risk information required
      4. 1.4 Overview of the financial landscape
      5. 1.5 Observations on the state of financial data within financial institutions
      6. 1.6 The challenge ahead for systemic risk information collection
      7. 1.7 Paths for collection of systemic risk information
      8. 1.8 Conclusions
      9. Bibliography
    3. 2 Aligning Models and Data for Systemic Risk Analysis
      1. 2.1 Introduction
      2. 2.2 Data aggregation and statistical inference: at what level of detail should data be collected?
      3. 2.3 Data linkage
      4. 2.4 Aligning data and models
      5. 2.5 A brief comment on confidentiality, anonymization and the role of consortia
      6. 2.6 Conclusion
      7. Bibliography
    4. 3 Applying FpML
      1. 3.1 Introduction
      2. 3.2 Inside FpML
      3. 3.3 Application to systemic risk
      4. 3.4 Conclusions
      5. Bibliography
    5. 4 Data Integration for Systemic Risk in the Financial System
      1. 4.1 The systemic risk data integration challenge
      2. 4.2 Data integration task model
      3. 4.3 Standards for data exchange
      4. 4.4 Tools for reconciling heterogeneity
      5. 4.5 Research questions
      6. 4.6 Conclusions
      7. Bibliography
    6. 5 Semantics in Systemic Risk Management
      1. 5.1 Dealing with semantics
      2. 5.2 Creating an ontology
      3. 5.3 Semantic technology applications
      4. 5.4 Operational data
      5. 5.5 Summary
      6. 5.6 The financial industry business ontology
      7. 5.7 FIBO and systemic risk
      8. Bibliography
  8. PART II: STATISTICS AND SYSTEMIC RISK
    1. Statistics and Systemic Risk
    2. 6 Statistical Assessments of Systemic Risk Measures
      1. 6.1 Introduction and background on systemic risk
      2. 6.2 CoVaR
      3. 6.3 Marginal Expected Shortfall
      4. 6.4 Other tail dependence measures
      5. 6.5 Conclusions & alternative systemic measure
      6. Bibliography
    3. 7 Regime Switching Models and Risk Measurement Tools
      1. 7.1 Introduction
      2. 7.2 Using regime shifting models with historical data
      3. 7.3 Using forward-looking data
      4. 7.4 Conclusions
      5. Bibliography
  9. PART III: MEASURING AND REGULATING SYSTEMIC RISK
    1. Measuring and Regulating Systemic Risk
    2. 8 Measuring Systemic Risk
      1. 8.1 The Dodd–Frank Wall Street reform and Consumer Protection Act
      2. 8.2 Evaluation of the Dodd–Frank Act
      3. 8.3 NYU Stern systemic risk rankings
      4. Bibliography
    3. 9 Taxing Systemic Risk
      1. 9.1 Systemic risk and the financial crisis of 2007 to 2009
      2. 9.2 Regulating systemic risk
      3. 9.3 The Dodd–Frank Wall Street reforms and Consumer Protection Act of2010
      4. 9.4 A tax on systemic risk
      5. 9.5 Summary
      6. Bibliography
    4. 10 Analyzing Systemic Risk of the European Banking Sector
      1. 10.1 Introduction
      2. 10.2 Methodology – measuring systemic risk
      3. 10.3 Data and summary statistics
      4. 10.4 Measuring systemic risk of European banks
      5. 10.5 Responses to the financial crisis of 2007–2009
      6. 10.6 After the crisis is before the crisis – the sovereign debt crisis of 2010
      7. 10.7 Conclusion
      8. Bibliography
  10. PART IV: NETWORKS
    1. Networks: Introduction
    2. 11 Network Models and Systemic Risk Assessment
      1. 11.1 Introduction
      2. 11.2 A network model of interbank exposures and contagion risk
      3. 11.3 Estimating network exposures
      4. 11.4 Creating loss scenarios
      5. 11.5 Clearing in the interbank market
      6. 11.6 Empirical findings
      7. 11.7 Extensions
      8. Bibliography
    3. 12 Strategic Interactions on Financial Networks for the Analysis of Systemic Risk
      1. 12.1 Financial networks and systemic risk
      2. 12.2 Diffusion-like processes over networks
      3. 12.3 An empirical application: the CME market
      4. 12.4 Conclusions and policy implications
      5. Bibliography
    4. 13 Network Structure and Systemic Risk in Banking Systems
      1. 13.1 Introduction
      2. 13.2 The network structure of banking systems
      3. 13.3 Systemic risk and default contagion
      4. 13.4 Is default contagion a significant source of systemic risk?
      5. 13.5 What makes an institution systemically important?
      6. 13.6 Does one size fit all? The case for targeted capital requirements
      7. Bibliography
  11. PART V: SYSTEMIC RISK AND MATHEMATICAL FINANCE
    1. Systemic Risk and Mathematical Finance
    2. 14 Firms, Banks and Households
      1. 14.1 Introduction
      2. 14.2 Modelling assumptions
      3. 14.3 Summary
      4. 14.4 Examples
      5. 14.5 Numerical results
      6. Bibliography
    3. 15 An Agent-Based Computational Model for Bank Formation and Interbank Networks
      1. 15.1 Introduction
      2. 15.2 The pre-banking society
      3. 15.3 Introducing banks
      4. 15.4 Interbank market
      5. 15.5 Communities of correlated preferences
      6. 15.6 Conclusions and further directions
      7. Bibliography
    4. 16 Diversification in Financial Networks may Increase Systemic Risk
      1. 16.1 Introduction
      2. 16.2 A bistable mean-field model for systemic risk
      3. 16.3 Review of some models for systemic risk
      4. 16.4 Summary and conclusion
      5. Bibliography
    5. 17 Systemic Risk Illustrated
      1. 17.1 Introduction
      2. 17.2 Stability illustrated by simulations
      3. 17.3 Mean-field limit
      4. 17.4 Large deviations and systemic risk
      5. 17.5 Conclusion
      6. Bibliography
    6. 18 Financial Crisis and Contagion: A Dynamical Systems Approach
      1. 18.1 Introduction
      2. 18.2 Assumptions on an economy
      3. 18.3 A nonlinear dynamic programming model
      4. 18.4 Market instability indicator
      5. 18.5 Financial crisis
      6. 18.6 Case studies and applications
      7. 18.7 Conclusion and further reading
      8. Bibliography
  12. PART VI: COUNTERPARTY RISK AND SYSTEMIC RISK
    1. Introduction
    2. Bibliography
    3. 19 Pricing and Mitigation of Counterparty Credit Exposures
      1. 19.1 Introduction
      2. 19.2 Notation and definitions
      3. 19.3 Risk-neutral pricing of counterparty risk
      4. 19.4 Application to interest-rate and credit default swaps
      5. 19.5 Future trends in counterparty risk
      6. 19.6 Conclusions
      7. Bibliography
    4. 20 Counterparty Contagion in Context: Contributions to Systemic Risk
      1. 20.1 Introduction
      2. 20.2 Contagion
      3. 20.3 Models of counterparty contagion
      4. 20.4 Other phenomena in models of systemic risk
      5. 20.5 Counterparty contagion and systemic risk
      6. 20.6 Systemic risk attribution
      7. 20.7 Avenues for progress
      8. Bibliography
  13. PART VII: ALGORITHMIC TRADING
    1. Algorithmic Trading
    2. 21 Market Microstructure Knowledge Needed for Controlling an Intra-Day Trading Process
      1. 21.1 Market microstructure modeling and payoff understanding are key elements of quantitative trading
      2. 21.2 From market design to market microstructure: practical examples
      3. 21.3 Forward and backward components of the price formation process
      4. 21.4 From statistically optimal trade scheduling to microscopic optimization of order flows
      5. 21.5 Perspectives and future work
      6. Bibliography
    3. 22 Dynamical Models of Market Impact and Algorithms for Order Execution
      1. 22.1 Introduction
      2. 22.2 Price impact and price manipulation
      3. 22.3 Temporary and permanent price impact
      4. 22.4 Transient price impact
      5. 22.5 Further extensions
      6. Bibliography
  14. PART VIII: BEHAVIORAL FINANCE: THE PSYCHOLOGICAL DIMENSION OF SYSTEMIC RISK
    1. Behavioral Finance: Introduction
    2. Bibliography
    3. 23 Fear, Greed, and Financial Crises: A Cognitive Neurosciences Perspective
      1. 23.1 Introduction
      2. 23.2 A brief history of the brain
      3. 23.3 Fear
      4. 23.4 Greed
      5. 23.5 Risk
      6. 23.6 Rationality
      7. 23.7 Sentience
      8. 23.8 Interactions
      9. 23.9 Policy implications
      10. 23.10 Conclusion
      11. Bibliography
    4. 24 Bubbles, Crises, and Heterogeneous Beliefs
      1. 24.1 Historical bubbles
      2. 24.2 Limits of arbitrage
      3. 24.3 Heterogeneous beliefs
      4. 24.4 Resale option theory of bubbles
      5. 24.5 Credit cycles
      6. 24.6 General equilibrium models with heterogeneous beliefs
      7. 24.7 Welfare analysis with distorted beliefs
      8. 24.8 Summary and future directions
      9. Bibliography
    5. 25 Systemic Risk and Sentiment
      1. 25.1 Introduction
      2. 25.2 Behavioral asset pricing theory and sentiment
      3. 25.3 Estimating the empirical SDF
      4. 25.4 Sentiment and the financial crisis
      5. 25.5 External measures of sentiment
      6. 25.6 Sentiment, systemic risk and leverage
      7. 25.7 Conclusion
  15. PART IX: REGULATION
    1. Regulation: Introduction
    2. 26 The New Financial Stability Framework in Europe
      1. 26.1 The new European approach to systemic risk
      2. 26.2 The new European systemic risk framework
      3. 26.3 The ECB approach to systemic risk
      4. 26.4 Global markets require a global approach to risk.
      5. 26.5 Conclusion
      6. Bibliography
    3. 27 Sector-Level Financial Networks and Macroprudential Risk Analysis in the Euro Area
      1. 27.1 Introduction
      2. 27.2 Description of the data
      3. 27.3 The network of balance sheet exposures for the aggregate Euro area financial system
      4. 27.4 Derivation of the risk-based balance sheets
      5. 27.5 Propagation of shocks in the risk-based financial network
      6. 27.6 Concluding remarks
      7. Bibliography
    4. 28 Systemic Risk Early Warning System: A Micro-Macro Prudential Synthesis
      1. 28.1 Introduction
      2. 28.2 EWS elements
      3. 28.3 Risk model and results
      4. 28.4 Discussion and implications
      5. 28.5 Conclusions and future work
      6. Bibliography
  16. PART X: COMPUTATIONAL ISSUES AND REQUIREMENTS
    1. Computational Issues and Requirements: Introduction
    2. 29 Enabling Data Analysis for Addressing Systemic Risk
      1. 29.1 Challenges in analyzing systemic risk
      2. 29.2 Approaches that support analysis
      3. 29.3 Analysis approaches
      4. 29.4 Discussion and future research
      5. Bibliography
    3. 30 Operational Considerations in an Analytic Environment for Systemic Risk
      1. 30.1 Introduction
      2. 30.2 Controlling the frame of reference
      3. 30.3 Managing the data environment
      4. 30.4 Model hosting and execution environment
      5. 30.5 Comparison and measurement across disparate models
      6. 30.6 Aggregation of risk components
      7. 30.7 From analysis to decisions
      8. Bibliography
    4. 31 Requirements for Systemic Risk Management in the Financial Sector
      1. 31.1 Introduction
      2. 31.2 History
      3. 31.3 Modern mortgage market
      4. 31.4 Network and counterparty risk
      5. 31.5 Requirements for broad scope risk
      6. 31.6 Integrated risk analytics
      7. 31.7 Reference data
      8. 31.8 Risk analytics services
      9. 31.9 Summary
      10. Bibliography
  17. PART XI: ACCOUNTING ISSUES
    1. Accounting and Systemic Risk: An Introduction
    2. Bibliography
    3. 32 Accounting’s Role in the Reporting, Creation, and Avoidance of Systemic Risk in Financial Institutions
      1. 32.1 Introduction
      2. 32.2 Some basics of accounting and financial reporting
      3. 32.3 Accounting for systemic risk
      4. 32.4 Accounting for different asset and liability classes
      5. 32.5 Accounting, pro-cyclicality and systemic risk: summary thoughts
      6. 32.6 Single firm versus systemic risk
      7. 32.7 Concluding remarks
      8. Bibliography