Bank Failures and Sovereign Debt

An analysis of the more and less important determinants of banking crises causing sovereign debt crises. Some careful conclusions can be drawn from the nationalization and guarantee variables. The focus is on the solvency of countries rather than the more often applied output gap. The debt to GDP behaved as in earlier research. History showed that banking crises can lead to extreme deviations in debt to GDP. Significant changes in debt to GDP do not always lead to sovereign debt crises. Bank failures in the USA are significantly related to debt to GDP over time.

Download: SOVEREIGN GUARANTEES, BANK FAILURES AND RECEIVERSHIP: Solution or increasing risk?

Source: Erasmus Thesis

Black Swan Statistics

Risk Modeling modern style is all about 'Predicting Instability'.

A "Black Swan", an event that is rare and difficult to predict, which could reflect either a sudden and large shift in the variance or the mean of a random variable.  A large shift in the mean or the variance of a random variable would mean an observation falling in the tails of the distribution.We would assume that a Black Swan is a large and a sudden change in the second moment.  That is a rare and highly improbable large change in the conditional variance of relevant macroeconomic data.      


The test statistics that are available to quality control engineers entail an interrogation of the real time data as they are observed; they sound alarm bells when the moments shift suddenly with high probability.
'Predicting Instability' provides a framework based on a statistic for the Sample Generalized Variance, which is useful for interrogating real time data and to predicting statistically significant sudden and large shifts in the conditional variance of a vector of correlated macroeconomic variables. Central banks can incorporate the framework in the policy making process.

Download: Predicting Instability
source: MPRA

When lightning strikes twice

Pension funds face a difficult challenge in coping with market volatility and modelling risk. Lisa Goldberg describes some of the available options in statistical analysis.

Download: When lightning strikes twice
Source: IPE, March 2010

VaR Limits for Pension Funds: An Evaluation

This paper evaluates the effects of imposing Value-at-Risk (VaR) limits and quantitative restrictions on portfolio choices in the context of a risk-based supervision framework for defined contribution pension funds. It shows the conditions under which VaR constraints are equivalent to constraints on volatility. The paper also presents some further considerations that regulators should take into account when adopting a risk-based supervision framework when contributions are mandatory and a significant part of the pension depends on the performance of past investments.

Download: VaR Limits for Pension Funds: An Evaluation

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