Market Procyclicality and Systemic Risk Report as inadecuate




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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.



Item Type: MPRA Paper -

Original Title: Market Procyclicality and Systemic Risk-

English Title: Market Procyclicality and Systemic Risk-

Language: English-

Keywords: Systemic risk, Procyclicality, Leverage, Market liquidity, Network models-

Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G20 - GeneralG - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation-





Author: Tasca, Paolo

Source: https://mpra.ub.uni-muenchen.de/45156/







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