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Functional Systemic Risk, Complementarities and Early Warnings

Author

Listed:
  • Cañón Salazar Carlos Iván
  • Gallón Santiago
  • Olivar Santiago

Abstract

This paper proposes a systemic risk index based on Functional Data Analysis (FDA), overcoming salient shortcomings of standard methodologies related to data usage, data sparseness, and high dimensionality issues. Using Mexican data, a set of systemic risk indexes are constructed and we show that the proposed functional index captures new information, and through simulations, that it outperforms previous methods when the indicators become increasingly nonlinear. Finally, we show which indexes serve as complements, and which are the best early warning indicators.

Suggested Citation

  • Cañón Salazar Carlos Iván & Gallón Santiago & Olivar Santiago, 2016. "Functional Systemic Risk, Complementarities and Early Warnings," Working Papers 2016-12, Banco de México.
    • Handle: RePEc:bdm:wpaper:2016-12
    as

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    File URL: https://www.banxico.org.mx/publications-and-press/banco-de-mexico-working-papers/%7BE1994FF8-7D6A-5B13-20CE-085E3EED4E22%7D.pdf
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    References listed on IDEAS

    as
    1. Acharya, Viral V., 2009. "A theory of systemic risk and design of prudential bank regulation," Journal of Financial Stability, Elsevier, vol. 5(3), pages 224-255, September.
    2. Allen, Franklin & Babus, Ana & Carletti, Elena, 2012. "Asset commonality, debt maturity and systemic risk," Journal of Financial Economics, Elsevier, vol. 104(3), pages 519-534.
    3. repec:dau:papers:123456789/15097 is not listed on IDEAS
    4. Allen, Franklin & Babus, Ana & Carletti, Elena, 2010. "Financial Connections and Systemic Risk," Working Papers 10-20, University of Pennsylvania, Wharton School, Weiss Center.
    5. Allen, F. & Babus, A. & Carletti, E., 2010. "Financial Connections and Systemic Risk," Other publications TiSEM a0b338ca-5b3b-48f9-964f-d, Tilburg University, School of Economics and Management.
    6. Aboura, Sofiane & Chevallier, Julien, 2015. "A cross-volatility index for hedging the country risk," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 38(C), pages 25-41.
    7. Allen, F. & Babus, A. & Carletti, E., 2010. "Financial Connections and Systemic Risk," Other publications TiSEM 76c1df26-9a76-424a-82b6-e, Tilburg University, School of Economics and Management.
    8. Linda Allen & Turan G. Bali & Yi Tang, 2012. "Does Systemic Risk in the Financial Sector Predict Future Economic Downturns?," The Review of Financial Studies, Society for Financial Studies, vol. 25(10), pages 3000-3036.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Systemic Risk; Functional Data Analysis; Dimensionality Reduction; Signal Informativeness;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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