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Measuring the probability of a financial crisis

When financial firms are undercapitalized, they are vulnerable to external shocks. The natural response to such vulnerability is to reduce leverage, and this can endogenously start a financial crisis. Excessive credit growth, the main cause of financial crises, is reflected in the undercapitalizatio...

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Autores principales: Engle, Robert F., Ruan, Tianyue
Formato: Online Artículo Texto
Lenguaje:English
Publicado: National Academy of Sciences 2019
Materias:
Acceso en línea:https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6744912/
https://www.ncbi.nlm.nih.gov/pubmed/31455741
http://dx.doi.org/10.1073/pnas.1903879116
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author Engle, Robert F.
Ruan, Tianyue
author_facet Engle, Robert F.
Ruan, Tianyue
author_sort Engle, Robert F.
collection PubMed
description When financial firms are undercapitalized, they are vulnerable to external shocks. The natural response to such vulnerability is to reduce leverage, and this can endogenously start a financial crisis. Excessive credit growth, the main cause of financial crises, is reflected in the undercapitalization of the financial sector. Market-based measures of systemic risk such as SRISK, which stands for systemic risk, enable monitoring how such weakness emerges and progresses in real time. In this paper, we develop quantitative estimates of the level of systemic risk in the financial sector that precipitates a financial crisis. Common approaches to reduce leverage correspond to specific scaling of systemic risk measures. In an econometric framework that recognizes financial crises represent left tail events for the economy, we estimate the relationship between SRISK and the financial crisis severity for 23 developed countries. We develop a probability of crisis measure and an SRISK capacity measure based on our estimates. Our analysis highlights the important global externality whereby the risk of a crisis in one country is strongly influenced by the undercapitalization of the rest of the world.
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spelling pubmed-67449122019-09-27 Measuring the probability of a financial crisis Engle, Robert F. Ruan, Tianyue Proc Natl Acad Sci U S A Social Sciences When financial firms are undercapitalized, they are vulnerable to external shocks. The natural response to such vulnerability is to reduce leverage, and this can endogenously start a financial crisis. Excessive credit growth, the main cause of financial crises, is reflected in the undercapitalization of the financial sector. Market-based measures of systemic risk such as SRISK, which stands for systemic risk, enable monitoring how such weakness emerges and progresses in real time. In this paper, we develop quantitative estimates of the level of systemic risk in the financial sector that precipitates a financial crisis. Common approaches to reduce leverage correspond to specific scaling of systemic risk measures. In an econometric framework that recognizes financial crises represent left tail events for the economy, we estimate the relationship between SRISK and the financial crisis severity for 23 developed countries. We develop a probability of crisis measure and an SRISK capacity measure based on our estimates. Our analysis highlights the important global externality whereby the risk of a crisis in one country is strongly influenced by the undercapitalization of the rest of the world. National Academy of Sciences 2019-09-10 2019-08-27 /pmc/articles/PMC6744912/ /pubmed/31455741 http://dx.doi.org/10.1073/pnas.1903879116 Text en Copyright © 2019 the Author(s). Published by PNAS. https://creativecommons.org/licenses/by-nc-nd/4.0/ https://creativecommons.org/licenses/by-nc-nd/4.0/This open access article is distributed under Creative Commons Attribution-NonCommercial-NoDerivatives License 4.0 (CC BY-NC-ND) (https://creativecommons.org/licenses/by-nc-nd/4.0/) .
spellingShingle Social Sciences
Engle, Robert F.
Ruan, Tianyue
Measuring the probability of a financial crisis
title Measuring the probability of a financial crisis
title_full Measuring the probability of a financial crisis
title_fullStr Measuring the probability of a financial crisis
title_full_unstemmed Measuring the probability of a financial crisis
title_short Measuring the probability of a financial crisis
title_sort measuring the probability of a financial crisis
topic Social Sciences
url https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6744912/
https://www.ncbi.nlm.nih.gov/pubmed/31455741
http://dx.doi.org/10.1073/pnas.1903879116
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