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Market Procyclicality and Systemic Risk

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If you have a question about this talk, please contact Mustapha Amrani .

Systemic Risk: Mathematical Modelling and Interdisciplinary Approaches

We model the systemic risk associated with the so-called balance-sheet amplica- tion mechanism in a system of banks with interlocked balance sheets and with posi- tions in real-economy-related assets. Our modeling framework integrates a stochas- tic price dynamics with an active balance-sheet management aimed to maintain the Value-at-Risk at a target level. We nd that a strong compliance with capi- tal requirements, usually alleged to be procyclical, does not increase systemic risk unless the asset market is illiquid. Conversely, when the asset market is illiquid, even a weak compliance with capital requirements increases signicantly systemic risk. Our ndings have implications in terms of possible macro-prudential policies to mitigate systemic risk.

This talk is part of the Isaac Newton Institute Seminar Series series.

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Average on weekdays: 9201.34390547 kWh Department of Psychology, 2nd Floor Seminar Room, Downing Site Webinar & LT2, Computer Laboratory, William Gates Building.

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