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TrAffic LIght system for systemic Stress: TALIS3

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  • Caporin, Massimiliano
  • Garcia-Jorcano, Laura
  • Jimenez-Martin, Juan-Angel

Abstract

For the purposes of financial stability, identifying financial institutions that, when in distress, could have a significant adverse impact on financial markets is important. A TrAffic LIght System for Systemic Stress (TALIS-cube) is proposed that provides a comprehensive color-based classification for grouping companies according to both the stress reaction level of the system when the company is in distress and the company’s stress level. TALIS3 can integrate multiple signals from the interaction between different risk metrics. Starting from specific risk indicators, companies are classified by combining two loss functions—one for the system and one for each company—evaluated over time and as a cross section. An aggregated index is also obtained from the color-based classification of companies. TALIS3 can be used to enhance the performance and robustness of existing systemic risk measures. An empirical analysis of the U.S. market is also provided.

Suggested Citation

  • Caporin, Massimiliano & Garcia-Jorcano, Laura & Jimenez-Martin, Juan-Angel, 2021. "TrAffic LIght system for systemic Stress: TALIS3," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    • Handle: RePEc:eee:ecofin:v:57:y:2021:i:c:s1062940821000772
    DOI: 10.1016/j.najef.2021.101449
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    Cited by:

    1. Pawe{l} Sakowski & Rafa{l} Sieradzki & Robert 'Slepaczuk, 2023. "Systemic risk indicator based on implied and realized volatility," Papers 2307.05719, arXiv.org.
    2. Paweł Sakowski & Rafał Sieradzki & Robert Ślepaczuk, 2023. "The systemic risk approach based on implied and realized volatility," Working Papers 2023-07, Faculty of Economic Sciences, University of Warsaw.
    3. Wang, Ze & Gao, Xiangyun & Huang, Shupei & Sun, Qingru & Chen, Zhihua & Tang, Renwu & Di, Zengru, 2022. "Measuring systemic risk contribution of global stock markets: A dynamic tail risk network approach," International Review of Financial Analysis, Elsevier, vol. 84(C).
    4. Caporin, Massimiliano & Garcia-Jorcano, Laura & Jimenez-Martin, Juan-Angel, 2022. "Measuring systemic risk during the COVID-19 period: A TALIS3 approach," Finance Research Letters, Elsevier, vol. 46(PA).
    5. Massimiliano Caporin & Petre Caraiani & Oguzhan Cepni & Rangan Gupta, 2024. "Predicting the Conditional Distribution of US Stock Market Systemic Stress: The Role of Climate Risks," Working Papers 202407, University of Pretoria, Department of Economics.

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    More about this item

    Keywords

    (B) Risk Analysis; Systemic Risk; CoVaR; Company rankings; Aggregated index;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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