City Research Online

Abstract

The 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 the 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 the SR are based on evaluating expectations in extreme regions and therefore, Extreme Value Theory (EVT) represents the key ingredient in producing valuable estimates of the 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. Interestingly, our findings reveal sensible results. That is, the SR has a significant impact under asymptotic dependence, while weak tail dependence, known as asymptotic independence, produces an insigniÖcant loss over the regulatory capital.

Publication Type:	Monograph (Working Paper)
Publisher Keywords:	asymptotics; dependence; max-domain of attraction; regular variation; rapid variation; systemic risk
Subjects:	H Social Sciences > HA Statistics H Social Sciences > HB Economic Theory
Departments:	Bayes Business School > Actuarial Science & Insurance

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