Monitoring indirect contagion
We propose two indicators for quantifying the potential exposure of financial institutions to indirect contagion arising from deleveraging of assets in stress scenarios. The first indicator, the Endogenous Risk Index (ERI) captures spillovers across portfolios arising from deleveraging in stress sce...
| Main Authors: | , |
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| Format: | Journal article |
| Language: | English |
| Published: |
Elsevier
2019
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| _version_ | 1797068646173900800 |
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| author | Cont, R Schaanning, E |
| author_facet | Cont, R Schaanning, E |
| author_sort | Cont, R |
| collection | OXFORD |
| description | We propose two indicators for quantifying the potential exposure of financial institutions to indirect contagion arising from deleveraging of assets in stress scenarios. The first indicator, the Endogenous Risk Index (ERI) captures spillovers across portfolios arising from deleveraging in stress scenarios. The second indicator, the Indirect Contagion Index (ICI) measures the systemic importance of a bank by quantifying the loss its distressed liquidation would inflict on other institutions. Both are computable from portfolio holdings of financial institutions and measures of market depth for the assets held in the portfolio. We discuss the micro-foundation of these indicators and apply them to the analysis of the vulnerability of the European banking system to indirect contagion.
Using data on portfolio holdings of European banks, we show that our indicators correlate to the magnitude of fire-sales losses in simulated stress scenarios, thus providing a simple to compute proxy for the outcome of stress tests. We also show that the information provided by our indicators on the systemic importance of banks is different from indicators based on size, thereby providing a measure of interconnectedness complementary to those currently used by supervisors. |
| first_indexed | 2024-03-06T22:13:09Z |
| format | Journal article |
| id | oxford-uuid:527e126d-1720-4e30-8d31-d1d77019a229 |
| institution | University of Oxford |
| language | English |
| last_indexed | 2024-03-06T22:13:09Z |
| publishDate | 2019 |
| publisher | Elsevier |
| record_format | dspace |
| spelling | oxford-uuid:527e126d-1720-4e30-8d31-d1d77019a2292022-03-26T16:25:55ZMonitoring indirect contagionJournal articlehttp://purl.org/coar/resource_type/c_dcae04bcuuid:527e126d-1720-4e30-8d31-d1d77019a229EnglishSymplectic Elements at OxfordElsevier2019Cont, RSchaanning, EWe propose two indicators for quantifying the potential exposure of financial institutions to indirect contagion arising from deleveraging of assets in stress scenarios. The first indicator, the Endogenous Risk Index (ERI) captures spillovers across portfolios arising from deleveraging in stress scenarios. The second indicator, the Indirect Contagion Index (ICI) measures the systemic importance of a bank by quantifying the loss its distressed liquidation would inflict on other institutions. Both are computable from portfolio holdings of financial institutions and measures of market depth for the assets held in the portfolio. We discuss the micro-foundation of these indicators and apply them to the analysis of the vulnerability of the European banking system to indirect contagion. Using data on portfolio holdings of European banks, we show that our indicators correlate to the magnitude of fire-sales losses in simulated stress scenarios, thus providing a simple to compute proxy for the outcome of stress tests. We also show that the information provided by our indicators on the systemic importance of banks is different from indicators based on size, thereby providing a measure of interconnectedness complementary to those currently used by supervisors. |
| spellingShingle | Cont, R Schaanning, E Monitoring indirect contagion |
| title | Monitoring indirect contagion |
| title_full | Monitoring indirect contagion |
| title_fullStr | Monitoring indirect contagion |
| title_full_unstemmed | Monitoring indirect contagion |
| title_short | Monitoring indirect contagion |
| title_sort | monitoring indirect contagion |
| work_keys_str_mv | AT contr monitoringindirectcontagion AT schaanninge monitoringindirectcontagion |