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Sat, 03 Oct 2015 16:24:35 +0100Sat, 03 Oct 2015 16:24:35 +0100Bank networks : contagion, systemic risk and prudential policy
http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/37119
We present a network model of the interbank market in which optimizing risk averse banks lend to each other and invest in non-liquid assets. Market clearing takes place through a tâtonnement process which yields the equilibrium price, while traded quantities are determined by means of a matching algorithm. We compare three alternative matching algorithms: maximum entropy, closest matching and random matching. Contagion occurs through liquidity hoarding, interbank interlinkages and fire sale externalities. The resulting network configurations exhibits a core-periphery structure, dis-assortative behavior and low clustering coefficient. We measure systemic importance by means of network centrality and input-output metrics and the contribution of systemic risk by means of Shapley values. Within this framework we analyze the effects of prudential policies on the stability/efficiency trade-off. Liquidity requirements unequivocally decrease systemic risk but at the cost of lower efficiency (measured by aggregate investment in non-liquid assets); equity requirements tend to reduce risk (hence increase stability) without reducing significantly overall investment.Iñaki Aldasoro; Domenico Delli Gatti; Ester Faiaworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/37119Tue, 10 Mar 2015 16:24:35 +0100Optimal monetary policy under commitment with a zero bound on nominal interest rates
http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/36054
We determine optimal monetary policy under commitment in a forwardlooking New Keynesian model when nominal interest rates are bounded below by zero. The lower bound represents an occasionally binding constraint that causes the model and optimal policy to be nonlinear. A calibration to the U.S. economy suggests that policy should reduce nominal interest rates more aggressively than suggested by a model without lower bound. Rational agents anticipate the possibility of reaching the lower bound in the future and this amplifies the effects of adverse shocks well before the bound is reached. While the empirical magnitude of U.S. mark-up shocks seems too small to entail zero nominal interest rates, shocks affecting the natural real interest rate plausibly lead to a binding lower bound. Under optimal policy, however, this occurs quite infrequently and does not imply positive average inflation rates in equilibrium. Interestingly, the presence of binding real rate shocks alters the policy response to (non-binding) mark-up shocks. Klaus Adam; Roberto M. Billireporthttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/36054Wed, 10 Dec 2014 11:10:32 +0100Endogenous grids in higher dimensions: Delaunay interpolation and hybrid methods
http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35016
This paper investigates extensions of the method of endogenous gridpoints (ENDGM) introduced by Carroll (2006) to higher dimensions with more than one continuous endogenous state variable. We compare three different categories of algorithms: (i) the conventional method with exogenous grids (EXOGM), (ii) the pure method of endogenous gridpoints (ENDGM) and (iii) a hybrid method (HYBGM). ENDGM comes along with Delaunay interpolation on irregular grids. Comparison of methods is done by evaluating speed and accuracy. We find that HYBGM and ENDGM both dominate EXOGM. In an infinite horizon model, ENDGM also always dominates HYBGM. In a finite horizon model, the choice between HYBGM and ENDGM depends on the number of gridpoints in each dimension. With less than 150 gridpoints in each dimension ENDGM is faster than HYBGM, and vice versa. For a standard choice of 25 to 50 gridpoints in each dimension, ENDGM is 1.4 to 1.7 times faster than HYBGM in the finite horizon version and 2.4 to 2.5 times faster in the infinite horizon version of the model.Alexander Ludwig; Matthias Schönworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35016Mon, 03 Nov 2014 17:09:04 +0100Systemic risk spillovers in the European banking and sovereign network : [Version September 10, 2014]
http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35086
We propose a framework for estimating network-driven time-varying systemic risk contributions that is applicable to a high-dimensional financial system. Tail risk dependencies and contributions are estimated based on a penalized two-stage fixed-effects quantile approach, which explicitly links bank interconnectedness to systemic risk contributions. The framework is applied to a system of 51 large European banks and 17 sovereigns through the period 2006 to 2013, utilizing both equity and CDS prices. We provide new evidence on how banking sector fragmentation and sovereign-bank linkages evolved over the European sovereign debt crisis and how it is reflected in network statistics and systemic risk measures. Illustrating the usefulness of the framework as a monitoring tool, we provide indication for the fragmentation of the European financial system having peaked and that recovery has started.Frank Betz; Nikolaus Hautsch; Tuomas A. Peltonen; Melanie Schienleworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35086Mon, 20 Oct 2014 13:02:32 +0200Systemic risk in an interconnected banking system with endogenous asset
markets : [version 30 march 2014]
http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/33829
This paper makes a conceptual contribution to the effect of monetary policy on financial stability. We develop a microfounded network model with endogenous network formation to analyze the impact of central banks' monetary policy interventions on systemic risk. Banks choose their portfolio, including their borrowing and lending decisions on the interbank market, to maximize profit subject to regulatory constraints in an asset-liability framework. Systemic risk arises in the form of multiple bank defaults driven by common shock exposure on asset markets, direct contagion via the interbank market, and firesale spirals. The central bank injects or withdraws liquidity on the interbank markets to achieve its desired interest rate target. A tension arises between the beneficial effects of stabilized interest rates and increased loan volume and the detrimental effects of higher risk taking incentives. We find that central bank supply of liquidity quite generally increases systemic risk.Marcel Bluhm; Jan Pieter Krahnenworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/33829Fri, 30 May 2014 10:54:25 +0200Monetary policy implementation in an interbank network: effects on systemic risk : [version 26 march 2014]
http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/33827
This paper makes a conceptual contribution to the effect of monetary policy on financial stability. We develop a microfounded network model with endogenous network formation to analyze the impact of central banks' monetary policy interventions on systemic risk. Banks choose their portfolio, including their borrowing and lending decisions on the interbank market, to maximize profit subject to regulatory constraints in an asset-liability framework. Systemic risk arises in the form of multiple bank defaults driven by common shock exposure on asset markets, direct contagion via the interbank market, and firesale spirals. The central bank injects or withdraws liquidity on the interbank markets to achieve its desired interest rate target. A tension arises between the beneficial effects of stabilized interest rates and increased loan volume and the detrimental effects of higher risk taking incentives. We find that central bank supply of liquidity quite generally increases systemic risk.Marcel Bluhm; Ester Faia; Jan Pieter Krahnenworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/33827Fri, 30 May 2014 10:41:12 +0200Financial network systemic risk contributions
http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/32497
We propose the realized systemic risk beta as a measure for financial companies’ contribution to systemic risk given network interdependence between firms’ tail risk exposures. Conditional on statistically pre-identified network spillover effects and market as well as balance sheet information, we define the realized systemic risk beta as the total time-varying marginal effect of a firm’s Value-at-risk (VaR) on the system’s VaR. Statistical inference reveals a multitude of relevant risk spillover channels and determines companies’ systemic importance in the U.S. financial system. Our approach can be used to monitor companies’ systemic importance allowing for a transparent macroprudential supervision.Nikolaus Hautsch; Julia Schaumburg; Melanie Schienleworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/32497Mon, 16 Dec 2013 09:12:18 +0100When do jumps matter for portfolio optimization? : [Version 29 April 2013]
http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/30569
We consider the continuous-time portfolio optimization problem of an investor with constant relative risk aversion who maximizes expected utility of terminal wealth. The risky asset follows a jump-diffusion model with a diffusion state variable. We propose an approximation method that replaces the jumps by a diffusion and solve the resulting problem analytically. Furthermore, we provide explicit bounds on the true optimal strategy and the relative wealth equivalent loss that do not rely on results from the true model. We apply our method to a calibrated affine model and fine that relative wealth equivalent losses are below 1.16% if the jump size is stochastic and below 1% if the jump size is constant and γ ≥ 5. We perform robustness checks for various levels of risk-aversion, expected jump size, and jump intensity.Marius Ascheberg; Nicole Branger; Holger Kraftworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/30569Thu, 27 Jun 2013 15:56:06 +0200