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Assessment of the Republic of Serbia's Systemic Risk and the Likelihood of a Systemic Crisis

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  • Darko Kovacevic

    (National Bank of Serbia)

Abstract

The purpose of this paper is to set up the Systemic Stress Indicator (SSI) of the Republic of Serbia’s financial system based on the proposed modification of the systemic stress testing approach that allows for a more appropriate aggregation of the observed indicators within the financial system segment. It also weighs up the advantages of the proposed approach compared to the aggregation methods most frequently used in literature. It proposes a mathematical formulation of the systemic risk level of the financial system and an analytical framework of the early warning system based on an assessment of the likelihood of a systemic crisis occurrence in case of an arbitrary number of regimes. The SSI has demonstrated the ability to correctly identify crisis periods and the systemic risk level of the Republic of Serbia’s financial system. It is suggested that probabilities of a systemic crisis occurrence in a given period are in perfect sync with the dynamics of undetected periods. An optimal period in the case of used indicators and relatively short time series is six months, which may provide timely signals to policy makers to mitigate negative effects on financial and macroeconomic stability.

Suggested Citation

  • Darko Kovacevic, 2021. "Assessment of the Republic of Serbia's Systemic Risk and the Likelihood of a Systemic Crisis," Working Papers Bulletin 2, National Bank of Serbia.
    • Handle: RePEc:nsb:bilten:2
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial stability; Systemic risk; Financial crisis; Macro-financial linkages; Markov-switching model; early warning model;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G01 - Financial Economics - - General - - - Financial Crises
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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