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- Title
Computing the probability of a financial market failure: a new measure of systemic risk.
- Authors
Jarrow, Robert; Protter, Philip; Quintos, Alejandra
- Abstract
This paper characterizes the probability of a market failure defined as the default of two or more globally systemically important banks (G-SIBs) in a small interval of time. The default probabilities of the G-SIBs are correlated through the possible existence of a market-wide stress event. The characterization employs a multivariate Cox process across the G-SIBs, which allows us to relate our work to the existing literature on intensity-based models. Various theorems related to market failure probabilities are derived, including the probability of a market failure due to two banks defaulting over the next infinitesimal interval, the probability of a catastrophic market failure, the impact of increasing the number of G-SIBs in an economy, and the impact of changing the initial conditions of the economy's state variables. We also show that if there are too many G-SIBs, a market failure is inevitable, i.e., the probability of a market failure tends to 1.
- Subjects
SYSTEMIC risk (Finance); FINANCIAL markets; PROBABILITY theory; MARKET failure; BANK failures
- Publication
Annals of Operations Research, 2024, Vol 336, Issue 1/2, p481
- ISSN
0254-5330
- Publication type
Article
- DOI
10.1007/s10479-022-05146-9