Tasca, Paolo;
Battiston, Stefano;
(2013)
Market Procyclicality and Systemic Risk.
(MPRA Paper
45156).
Munich Personal RePEc Archive: Munich, Germany.
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Abstract
We model the systemic risk associated with the so-called balance-sheet amplification mechanism in a system of banks with interlocked balance sheets and with positions in real-economy-related assets. Our modeling framework integrates a stochastic price dynamics with an active balance-sheet management aimed to maintain the Value-at-Risk at a target level. We find that a strong compliance with capital 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 significantly systemic risk. Our findings have implications in terms of possible macro-prudential policies to mitigate systemic risk.
| Type: | Working / discussion paper |
|---|---|
| Title: | Market Procyclicality and Systemic Risk |
| Open access status: | An open access version is available from UCL Discovery |
| DOI: | 10.2139/ssrn.2170293 |
| Publisher version: | http://mpra.ub.uni-muenchen.de/45156/ |
| Language: | English |
| Additional information: | This version is the version of record. For information on re-use, please refer to the publisher’s terms and conditions. |
| Keywords: | Systemic risk, Procyclicality, Leverage, Market liquidity, Network models |
| UCL classification: | UCL UCL > Provost and Vice Provost Offices > UCL BEAMS UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > Dept of Computer Science |
| URI: | https://discovery-pp.ucl.ac.uk/id/eprint/10179674 |
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