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SYSTEMIC RISK: AN ASYMPTOTIC EVALUATION

Published online by Cambridge University Press:  18 December 2017

Alexandru V. Asimit  and
Jinzhu Li
Alexandru V. Asimit
Affiliation:
Cass Business School, City, University of London, London EC1Y 8TZ, UK, E-Mail: asimit@city.ac.uk
Jinzhu Li*
Affiliation:
School of Mathematical Science and LPMC, Nankai University, Tianjin 300071, P.R. China
*
E-mail: lijinzhu@nankai.edu.cn
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Abstract

Systemic risk (SR) has been shown to play an important role in explaining the financial turmoils in the last several decades and understanding this source of risk has been a particular interest amongst academics, practitioners and regulators. The precise mathematical formulation of SR is still scrutinised, but the main purpose is to evaluate the financial distress of a system as a result of the failure of one component of the financial system in question. Many of the mathematical definitions of SR are based on evaluating expectations in extreme regions and therefore, Extreme Value Theory (EVT) represents the key ingredient in producing valuable estimates of SR and even its decomposition per individual components of the entire system. Without doubt, the prescribed dependence model amongst the system components has a major impact over our asymptotic approximations. Thus, this paper considers various well-known dependence models in the EVT literature that allow us to generate SR estimates. Our findings reveal that SR has a significant impact under asymptotic dependence, while weak tail dependence, known as asymptotic independence, produces an insignificant loss over the regulatory capital.

Keywords

Asymptoticsdependencemax-domain of attractionregular variationrapid variationsystemic risk
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 48 , Issue 2 , May 2018 , pp. 673 - 698
Copyright
Copyright © Astin Bulletin 2017 

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