Posted by Serhat Yucel, FRM on July 23, 2011
by Monica Billio, Mila Getmansky, Andrew W. Lo and Loriana Pelizzon
Abstract: We propose several econometric measures of systemic risk to capture the interconnectedness amongthe monthly returns of hedge funds, banks, brokers, and insurance companies based on principalcomponents analysis and Granger-causality tests. We find that all four sectors have become highlyinterrelated over the past decade, increasing the level of systemic risk in the finance and insuranceindustries. These measures can also identify and quantify financial crisis periods, and seem to containpredictive power for the current financial crisis. Our results suggest that hedge funds can provideearly indications of market dislocation, and systemic risk arises from a complex and dynamic networkof relationships among hedge funds, banks, insurance companies, and brokers.
Econometric Measures of Systemic Risk in The Finance and Insurance Sectors
Posted by Serhat Yucel, FRM on July 17, 2011
Founder of Arch/Garch discusses the reasons of crisis…
Abstract: Financial risk management has generally focused on short term risks rather than long term risks and arguably this was an important component of the recent financial crisis. Econometric approaches to measuring long term risk are developed in order to estimate the term structure of VaR and ES. Long term negative skewness increases the downside risk and is a consequence of asymmetric volatility models. A test is developed for long term skewness. In a Merton style structural default model, bankruptcies are accompanied by substantial drops in equity prices. Thus skewness in a market factor implies high defaults and default correlations even far in the future corroborating the systemic importance of long term skewness. Investors concerned about long term risks may hedge exposure as in the ICAPM. As a consequence, the aggregate wealth portfolio should have asymmetric volatility and hedge portfolios should have reversed asymmetric volatility. Using estimates from VLAB, reversed asymmetric volatility is found for many possible hedge portfolios such as volatility products, long and short term treasuries, some exchange rates and gold.
SoFiE Presidential Paper
Posted by Serhat Yucel, FRM on July 16, 2011
The attached article measures the systemic risk of european banking sector with a relatively new approach.