Early warning of systemic risk in global banking: eigen-pair R number for financial contagion and market price-based methods

Sheri Markose, Simone Giansante, Nicolas A. Eterovic, Mateusz Gatkowski

Research output: Contribution to journalArticlepeer-review

2 Citations (SciVal)

Abstract

We analyse systemic risk in the core global banking system using a new network-based spectral eigen-pair method, which treats network failure as a dynamical system stability problem. This is compared with market price-based Systemic Risk Indexes, viz. Marginal Expected Shortfall, Delta Conditional Value-at-Risk, and Conditional Capital Shortfall Measure of Systemic Risk in a cross-border setting. Unlike paradoxical market price based risk measures, which underestimate risk during periods of asset price booms, the eigen-pair method based on bilateral balance sheet data gives early-warning of instability in terms of the tipping point that is analogous to the R number in epidemic models. For this regulatory capital thresholds are used. Furthermore, network centrality measures identify systemically important and vulnerable banking systems. Market price-based SRIs are contemporaneous with the crisis and they are found to covary with risk measures like VaR and betas.

Original languageEnglish
Pages (from-to)691-729
JournalAnnals of Operations Research
Volume330
Early online date2 Jun 2021
DOIs
Publication statusPublished - Nov 2023

Keywords

  • Early warning signals
  • Eigen-pair analysis
  • Global financial networks
  • OR in banking
  • Paradoxical risk measures
  • Statistical market price-based risk measures
  • Systemic risk

ASJC Scopus subject areas

  • Decision Sciences(all)
  • Management Science and Operations Research

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