Systemic Contingent Claims Analysis: Estimating Market-Implied Systemic Risk

IMF Working Papers, February 27, 2013

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Systemic Contingent Claims Analysis: Estimating Market-Implied Systemic Risk

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Bibliographic details

• Authors: Andreas Jobst, Dale F. Gray
• Published: February 27, 2013
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781475572780.001

Overview and Purpose

• Presents a forward-looking framework ("Systemic CCA") to measure systemic solvency risk based on market-implied expected losses of financial institutions.
• Aims to support financial sector risk management and system-wide capital assessment in top-down stress testing.
• Uses advanced contingent claims analysis (CCA) to generate aggregate estimates of joint default risk as a conditional tail expectation (CTE) using multivariate extreme value theory (EVT).
• Framework also quantifies individual contributions to systemic risk and contingent liabilities of the financial sector during times of stress.

Key Findings and Concepts

• Systemic CCA provides market-implied measures of solvency risk and expected losses for financial institutions.
• Joint default risk of multiple institutions is estimated as a conditional tail expectation using multivariate EVT.
• The approach links contingent claims analysis outputs (e.g., implied asset value, equity put option value, CDS put option value) to system-wide capital assessment and stress testing.
• The framework supports decomposition of systemic risk into individual institution contributions and contingent liabilities.

Policy Relevance and Applications

• Useful for macroprudential policy and surveillance (MPS) efforts aimed at mitigating risk from systemic linkages and enhancing financial sector resilience.
• Practical applications include:
  • Financial sector risk management.
  • Top-down stress testing and system-wide capital assessment.
  • Informing regulatory frameworks to address systemic solvency risk.

Technical Elements and Methodology

• Core methodological components:
  • Contingent claims analysis (CCA).
  • Conditional tail expectation (CTE) as the aggregation measure for expected losses.
  • Multivariate extreme value theory (EVT) to model joint tail events.
• Relevant metrics and concepts emphasized:
  • Implied asset value.
  • Asset volatility.
  • Equity put option value.
  • CDS put option value.
  • Risk-adjusted balance sheets.
  • Capital assessment and capital shortfall.
  • Expected loss and contingent liabilities.

Subjects and Keywords

• Subjects:
  • Asset and liability management
  • Asset valuation
  • Contingent liabilities
  • Debt default
  • External debt
  • Financial sector policy and analysis
  • Financial statements
  • Public financial management (PFM)
  • Systemic risk
• Keywords:
  • Asset valuation, asset volatility, balance sheet approach, bank debt, capital assessment, capital shortfall, CDS put option value, conditional tail expectation (CTE), contingent claims analysis (CCA), contingent liabilities, Debt default, equity capital, equity put option value, expected loss, extreme value theory (EVT), financial market, Financial statements, Global, implied asset value, macroprudential policy and surveillance, market risk exposure, market value, put option, risk-adjusted balance sheets, stress testing, systemic CCA, systemic risk, WP

Content in this bundle

• 1. General Systemic Risk Measurement Approaches.
  • 1. General Systemic Risk Measurement Approaches. (Markdown version)
  • 1. General Systemic Risk Measurement Approaches. (PDF)