Please use this identifier to cite or link to this item: https://doi.org/10.1073/pnas.1903879116
Title: Measuring the probability of a financial crisis
Authors: Engle, Robert F
Ruan, Tianyue 
Keywords: Science & Technology
Multidisciplinary Sciences
Science & Technology - Other Topics
financial stability
systemic risk
probability of crisis
CAPITAL SHORTFALL
LEVERAGE
Issue Date: 10-Sep-2019
Publisher: NATL ACAD SCIENCES
Citation: Engle, Robert F, Ruan, Tianyue (2019-09-10). Measuring the probability of a financial crisis. PROCEEDINGS OF THE NATIONAL ACADEMY OF SCIENCES OF THE UNITED STATES OF AMERICA 116 (37) : 18341-18346. ScholarBank@NUS Repository. https://doi.org/10.1073/pnas.1903879116
Abstract: When financial firms are undercapitalized, they are vulnerable to external shocks. The natural response to such vulnerability is to reduce leverage, and this can endogenously start a financial crisis. Excessive credit growth, the main cause of financial crises, is reflected in the undercapitalization of the financial sector. Market-based measures of systemic risk such as SRISK, which stands for systemic risk, enable monitoring how such weakness emerges and progresses in real time. In this paper, we develop quantitative estimates of the level of systemic risk in the financial sector that precipitates a financial crisis. Common approaches to reduce leverage correspond to specific scaling of systemic risk measures. In an econometric framework that recognizes financial crises represent left tail events for the economy, we estimate the relationship between SRISK and the financial crisis severity for 23 developed countries. We develop a probability of crisis measure and an SRISK capacity measure based on our estimates. Our analysis highlights the important global externality whereby the risk of a crisis in one country is strongly influenced by the undercapitalization of the rest of the world.
Source Title: PROCEEDINGS OF THE NATIONAL ACADEMY OF SCIENCES OF THE UNITED STATES OF AMERICA
URI: https://scholarbank.nus.edu.sg/handle/10635/227539
ISSN: 00278424
10916490
DOI: 10.1073/pnas.1903879116
Appears in Collections:Staff Publications
Elements

Show full item record
Files in This Item:
File Description SizeFormatAccess SettingsVersion 
Engle & Ruan - PNAS 2019.pdfAccepted version681.31 kBAdobe PDF

OPEN

NoneView/Download

SCOPUSTM   
Citations

11
checked on Oct 1, 2022

Page view(s)

29
checked on Sep 29, 2022

Download(s)

1
checked on Sep 29, 2022

Google ScholarTM

Check

Altmetric


Items in DSpace are protected by copyright, with all rights reserved, unless otherwise indicated.