A theoretical framework for simulating systemic risk and its application to analysis of the banking system
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Date
2021
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Informa UK Limited
Abstract
Risk of basic defaults and contagious defaults are two main sources of bank systemic risk. In this paper, a theoretical framework is proposed to classify the time evolution of the basic defaults and contagious defaults using sequences of daily financial data. The new theoretical framework combines an existing asset value estimation algorithm and obligation clearing algorithm to calculate the time evolution of systemic risk. The asset value estimation algorithm is used to estimate the asset values of the banks each day and the obligation clearing algorithm is used to calculate systemic risk given the tuples of data each day. This framework is applied to assess the systemic risk of the Nigerian banking system between 2008 and 2014 when the economy was hit by the financial meltdown. The main findings depict that the risk of the basic defaults was high during this period while contagious default seldom appeared. It is also found that the Nigerian banking system was more stable in 2010 and 2012 than in other years, while it was seriously unstable in 2008, 2011, and 2014. The findings would assist in monitoring systemic risk in the Nigerian banking system.
Description
Full text article. Also available at https://doi.org/10.1080/23322039.2021.1986930
Keywords
Systemec risk, Network analysis, Interbank market, Bank defaults, Financial stability
Citation
Keregero, C. M. (2021). A theoretical framework for simulating systemic risk and its application to analysis of the banking system. Cogent Economics & Finance, 9(1), 1986930.