Backtesting macroprudential stress tests
In: Journal of economic dynamics & control, Band 137, S. 104333
ISSN: 0165-1889
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In: Journal of economic dynamics & control, Band 137, S. 104333
ISSN: 0165-1889
In: Bank of England Working Paper No. 1002
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In: Journal of economic dynamics & control, Band 111, S. 103817
ISSN: 0165-1889
In: Journal of Economic Dynamics and Control, Forthcoming
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In: Deutsche Bundesbank Discussion Paper No. 45/2020
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In: Bank of England Working Paper No. 878
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In: ESRB: Working Paper Series No. 2018/84
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There is growing consensus that processes of market integration and risk diversification may come at the price of more systemic risk. Indeed, financial institutions are interconnected in a network of contracts where distress can either be amplified or dampened. However, a mathematical understanding of instability in relation to the network topology is still lacking. In a model financial network, we show that the origin of instability resides in the presence of specific types of cyclical structures, regardless of many of the details of the distress propagation mechanism. In particular, we show the existence of trajectories in the space of graphs along which a complex network turns from stable to unstable, although at each point along the trajectory its nodes satisfy constraints that would apparently make them individually stable. In the financial context, our findings have important implications for policies aimed at increasing financial stability. We illustrate the propositions on a sample dataset for the top 50 EU listed banks between 2008 and 2013. More in general, our results shed light on previous findings on the instability of model ecosystems and are relevant for a broad class of dynamical processes on complex networks.
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In: Journal of economic dynamics & control, Band 51, S. 50-63
ISSN: 0165-1889
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