We examine whether the concern about insurers selling similar assets due to an overlap in holdings is justified. We measure this overlap using cosine similarity and find that insurers with more ...similar portfolios have larger subsequent common sales. When faced with a shock to assets or liabilities, exposed insurers with greater portfolio similarity have larger common sales that impact prices. Our portfolio similarity measure can be used by regulators to predict the common selling of any institution that reports security or asset class holdings, making the measure a useful ex ante predictor of divestment behavior in times of market stress.
• We change the definition of financial distress in CoVaR. • We consider more severe distress events, backtest CoVaR, and improve its consistency. • Our CoVaR and VaR have a weak relation in the ...cross-section and in the time-series. • Depository institutions contribute the most to systemic risk. • Leverage, size, and equity beta are important in explaining systemic risk.
We modify Adrian and Brunnermeier’s (2011) CoVaR, the VaR of the financial system conditional on an institution being in financial distress. We change the definition of financial distress from an institution being exactly at its VaR to being at most at its VaR. This change allows us to consider more severe distress events, to backtest CoVaR, and to improve its consistency (monotonicity) with respect to the dependence parameter. We define the systemic risk contribution of an institution as the change from its CoVaR in its benchmark state (defined as a one-standard deviation event) to its CoVaR under financial distress. We estimate the systemic risk contributions of four financial industry groups consisting of a large number of institutions for the sample period June 2000 to February 2008 and the 12months prior to the beginning of the crisis. We also investigate the link between institutions’ contributions to systemic risk and their characteristics.
This paper empirically analyses whether post-global financial crisis regulatory reforms have created appropriate incentives to voluntarily centrally clear over-the-counter (OTC) derivative contracts. ...We use confidential European trade repository data on single-name sovereign credit default swap (CDS) transactions and show that both seller and buyer manage counterparty exposures and capital costs, strategically choosing to clear when the counterparty is riskier. The clearing incentives seem particularly responsive to seller credit risk, which is in line with the notion that counterparty credit risk (CCR) is asymmetric in CDS contracts. The riskiness of the underlying reference entity also impacts the decision to clear as it affects both CCR capital charges for OTC contracts and central counterparty clearing house (CCP) margins for cleared contracts. Lastly, we find evidence that when a transaction helps netting positions with the CCP and hence lower margins, the likelihood of clearing is higher.
Concentrated risks in the market for credit default swaps (CDSs) are widely considered to have contributed significantly to the 2007–08 financial crisis. We examine the structure of the CDS market ...using a network-based approach that allows us to capture the interconnectedness between dealers and nondealers of CDS contracts. We find a high degree of interconnectivity among major market participants. Our work helps assess the stability of the CDS market and the potential contagion among market participants. Our findings are of practical importance because even after central clearing becomes mandatory, counterparty risk will remain a relevant systemic consideration owing to the long-term nature of CDS contracts.
The Nicaraguan revolution is discussed. The struggle presented theological questions for the Roman Catholic Church, which in the past has taken stances that seemed opportunistic rather than Christian.
PDF
