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

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
JournalAnnals of Operations Research
Early online date2 Jun 2021
DOIs
Publication statusE-pub ahead of print - 2 Jun 2021

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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