Systematic Risk to the Financial System, Economy

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Systematic Risk to the Financial System, Economy

David St John
Dear R-Fin Community,

Has there been any work done since the financial crisis in defining what are
the systematic risks to the financial system, and the economy as a whole, in
certain derivatives positions, securitizing mortgages, excessive leverage,
poor liquidity ala LTCM, etc?  Could I use R, hypothetically, to analyze
past data with respect to a basket of derivatives, to come up with some kind
of measure for how close we are to a 'doomsday' scenario, like a near total
market value meltdown of mortgage backed securities?

I would also very much appreciate anyone willing to message me off list to
explain what legislative or fed policy reforms, if any, could prevent big
banks from creating such risks.  What better perspective on this than an
insider's perspective?

Best,
-David

        [[alternative HTML version deleted]]

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Re: Systematic Risk to the Financial System, Economy

Adams, Zeno
David,

I have been recently working on this subject. It seems that the focus has shifted away from "systematic risks" and on to "systemic risk", i.e. the risk that one asset or financial institution in distress causes significant spillovers on other institutions and, perhaps on the entire market. I find the following papers worth reading and believe their methods to be implementable in R:

Brownlees, Christian T. and Engle, Robert F., Volatility, Correlation and Tails for Systemic Risk Measurement (June 1, 2011). Available at SSRN: http://ssrn.com/abstract=1611229

They also have a nice homepage on http://vlab.stern.nyu.edu/welcome/risk


Brunnermeier, K., and Adrian, T. (2011). "CoVaR" http://www.princeton.edu/~markus/research/papers/CoVaR.pdf
This paper is very well known among central bankers and policy makers


Adams, Z., Füss,R., and Gropp, R. (2011) "Modeling Spillover Effects among Financial Institutions: A State-Dependent-Sensitivity Value-at-Risk Approach" http://www.irmc.eu/public/files/Adams,Fuss,Gropp_Spillover%20effects%20among%20financial%20institutions.pdf


Acharya, Viral V., Pedersen, Lasse Heje, Philippon, Thomas and Richardson, Matthew P., Measuring Systemic Risk (May 2010). AFA 2011 Denver Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1573171

All methods described in these papers may be useful for measuring how close we are to a "doomsday" scenario. The papers also offer some guidance on legislative reforms that would be necessary to prevent big banks from creating systemic risk.

HTH

Zeno

-----Original Message-----
From: [hidden email] [mailto:[hidden email]] On Behalf Of David St John
Sent: Montag, 3. Oktober 2011 15:35
To: [hidden email]
Subject: [R-SIG-Finance] Systematic Risk to the Financial System, Economy

Dear R-Fin Community,

Has there been any work done since the financial crisis in defining what are
the systematic risks to the financial system, and the economy as a whole, in
certain derivatives positions, securitizing mortgages, excessive leverage,
poor liquidity ala LTCM, etc?  Could I use R, hypothetically, to analyze
past data with respect to a basket of derivatives, to come up with some kind
of measure for how close we are to a 'doomsday' scenario, like a near total
market value meltdown of mortgage backed securities?

I would also very much appreciate anyone willing to message me off list to
explain what legislative or fed policy reforms, if any, could prevent big
banks from creating such risks.  What better perspective on this than an
insider's perspective?

Best,
-David

        [[alternative HTML version deleted]]

_______________________________________________
[hidden email] mailing list
https://stat.ethz.ch/mailman/listinfo/r-sig-finance
-- Subscriber-posting only. If you want to post, subscribe first.
-- Also note that this is not the r-help list where general R questions should go.
EBS European Business School gemeinnuetzige GmbH, Amtsgericht Wiesbaden HRB 19951; Universitaet fuer Wirtschaft und Recht, Umsatzsteuer-ID DE 113891213; Aufsichtsrat: Dr. Hellmut K. Albrecht, Vorsitzender; Geschaeftsfuehrung: Professor Dr. Rolf D. Cremer, Präsident; Professor Dr. Rolf Tilmes, Dekan EBS Business School; Professor Dr. Dr. Gerrick Frhr. v. Hoyningen-Huene, Dekan EBS Law School; Georg Nikolaus Garlichs, Kanzler

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Re: Systematic Risk to the Financial System, Economy

Kenton Russell

Great papers.  For those who do not know David (http://math.uic.edu/~dstjohn/thesis.pdf), he made a great contribution to the R community with his ttrTests package.  How great would the world be if every research paper also came with R code? On the systemic/systematic risk side, this http://timelyportfolio.blogspot.com/2011/04/great-faj-article-on-statistical_6197.html post on http://www.cfapubs.org/doi/abs/10.2469/faj.v66.n5.3 might stimulate some ideas even though it is not as comprehensive/applicable as I would like.  Kenthttp://timelyportfolio.blogspot.com
 Date: Tue, 4 Oct 2011 15:01:38 +0200
From: [hidden email]
To: [hidden email]; [hidden email]
Subject: Re: [R-SIG-Finance] Systematic Risk to the Financial System, Economy

David,
 
I have been recently working on this subject. It seems that the focus has shifted away from "systematic risks" and on to "systemic risk", i.e. the risk that one asset or financial institution in distress causes significant spillovers on other institutions and, perhaps on the entire market. I find the following papers worth reading and believe their methods to be implementable in R:
 
Brownlees, Christian T. and Engle, Robert F., Volatility, Correlation and Tails for Systemic Risk Measurement (June 1, 2011). Available at SSRN: http://ssrn.com/abstract=1611229
 
They also have a nice homepage on http://vlab.stern.nyu.edu/welcome/risk
 
 
Brunnermeier, K., and Adrian, T. (2011). "CoVaR" http://www.princeton.edu/~markus/research/papers/CoVaR.pdf
This paper is very well known among central bankers and policy makers
 
 
Adams, Z., Füss,R., and Gropp, R. (2011) "Modeling Spillover Effects among Financial Institutions: A State-Dependent-Sensitivity Value-at-Risk Approach" http://www.irmc.eu/public/files/Adams,Fuss,Gropp_Spillover%20effects%20among%20financial%20institutions.pdf
 
 
Acharya, Viral V., Pedersen, Lasse Heje, Philippon, Thomas and Richardson, Matthew P., Measuring Systemic Risk (May 2010). AFA 2011 Denver Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1573171
 
All methods described in these papers may be useful for measuring how close we are to a "doomsday" scenario. The papers also offer some guidance on legislative reforms that would be necessary to prevent big banks from creating systemic risk.
 
HTH
 
Zeno
 
-----Original Message-----
From: [hidden email] [mailto:[hidden email]] On Behalf Of David St John
Sent: Montag, 3. Oktober 2011 15:35
To: [hidden email]
Subject: [R-SIG-Finance] Systematic Risk to the Financial System, Economy
 
Dear R-Fin Community,
 
Has there been any work done since the financial crisis in defining what are
the systematic risks to the financial system, and the economy as a whole, in
certain derivatives positions, securitizing mortgages, excessive leverage,
poor liquidity ala LTCM, etc?  Could I use R, hypothetically, to analyze
past data with respect to a basket of derivatives, to come up with some kind
of measure for how close we are to a 'doomsday' scenario, like a near total
market value meltdown of mortgage backed securities?
 
I would also very much appreciate anyone willing to message me off list to
explain what legislative or fed policy reforms, if any, could prevent big
banks from creating such risks.  What better perspective on this than an
insider's perspective?
 
Best,
-David
 
        [[alternative HTML version deleted]]
 
_______________________________________________
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https://stat.ethz.ch/mailman/listinfo/r-sig-finance
-- Subscriber-posting only. If you want to post, subscribe first.
-- Also note that this is not the r-help list where general R questions should go.

EBS European Business School gemeinnuetzige GmbH, Amtsgericht Wiesbaden HRB 19951; Universitaet fuer Wirtschaft und Recht, Umsatzsteuer-ID DE 113891213; Aufsichtsrat: Dr. Hellmut K. Albrecht, Vorsitzender; Geschaeftsfuehrung: Professor Dr. Rolf D. Cremer, Präsident; Professor Dr. Rolf Tilmes, Dekan EBS Business School; Professor Dr. Dr. Gerrick Frhr. v. Hoyningen-Huene, Dekan EBS Law School; Georg Nikolaus Garlichs, Kanzler
_______________________________________________
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