Understanding Systemic Risk in Global Financial Markets

APPENDIXSystemic Risk Models

INTRODUCTION

In Chapter 5 we discussed the importance of data to allow for the effective monitoring of systemic risk. We provided several examples of existing public indices that may be used as early warning indicators of systemic risk buildup, such as the CBOE Volatility Index, the St. Louis Fed Financial Stress Index, and the Global Financial Stress Index, to name a few.

This appendix provides a taxonomy and literature review of some of the key quantitative models that are used to measure systemic risk in different ways. We begin by introducing how “structural” default models may be used as an analytical tool for assessing default risk in companies. The rest of this chapter consists of a comprehensive survey of several different categories of existing systemic risk models used by a combination of risk management professionals, systemic risk regulators, and academics.

A key goal of this model taxonomy is to provide stakeholders the ability to identify a particular model(s) that is best suited for their specific type of research or goal. For example, systemic risk regulators may find the models covered in the section on macroprudential tools useful, whereas credit risk management professionals may be drawn to the Counterparty Risk models. While certain models may represent a good fit for a given industry participant, many of the models discussed herein will be useful for more than one category of stakeholder.

STRUCTURAL VERSUS REDUCED-FORM CREDIT ...