Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2010-10-18
Revision-Date: 2010-11-29
Number: 10-104/2/DSF 2
Author-Name: Bernd Schwaab
Author-Email: Bernd.Schwaab@ecb.int
Author-Workplace-Name: VU University Amsterdam, and European Central Bank
Author-Name: Andre Lucas
Author-Email: alucas@feweb.vu.nl
Author-Workplace-Name: VU University Amsterdam
Author-Name: Siem Jan Koopman
Author-Email: s.j.koopman@feweb.vu.nl
Author-Workplace-Name: VU University Amsterdam
Title: Systemic Risk Diagnostics
Abstract: A macro-prudential policy maker can manage risks to financial stability only if currentand future risks can be reliably assessed. We propose a novel framework to assessfinancial system risk. Using a dynamic factor framework based on state-space methods, we model latent macro-financial and credit risk components for a large data setcomprising the U.S., the EU-27 area, and the rest of the world. Controlling for global,region-specific, and industry effects, we construct coincident measures ('thermometers')and forward looking indicators of financial distress and the likelihood of financial melt-down. We find that credit risk conditions can significantly and persistently de-couplefrom macro-financial fundamentals. Such decoupling can serve as an early warningsignal for macro-prudential policy.
Classification-JEL: G21, C33
Keywords: financial crisis; systemic risk; credit portfolio models; frailty-correlated defaults; state space methods
File-Url: https://papers.tinbergen.nl/10104.pdf
File-Format: application/pdf
File-Size: 537160 bytes
Handle: RePEc:tin:wpaper:20100104