2018/09/10 by Yu‐Sin Chang, Chang, Yu-Sin
Economics, Econometrics and Finance · #Banking stability, regulation, efficiency #Credit Risk and Financial Regulations #FOS: Economics and business #Global Financial Crisis and Policies #Mathematical Finance (q-fin.MF)
paper · pdf · doi:10.48550/arxiv.1809.03425
openalex publication_date 2018/09/10 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
We propose a dynamic model of dependence structure between financial institutions within a financial system and we construct measures for dependence and financial instability. Employing Markov structures of joint credit migrations, our model allows for contagious simultaneous jumps in credit ratings and provides flexibility in modeling dependence structures. Another key aspect is that the proposed measures consider the interdependence and reflect the changing economic landscape as financial institutions evolve over time. In the final part, we give several examples, where we study various dependence structures and investigate their systemic instability measures. In particular, we show that subject to the same pool of Markov chains, the simulated Markov structures with distinct dependence structures generate different sequences of systemic instability.