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20.04.2014
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Risk and Volatility in the Financial Sector

An efficient and fully operative financial sector is a crucial building block for a healthy economy. The current financial crisis particularly shows, how the failure of single components can spill over to the whole sector and finally cause huge damage to the real economy.

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Thus the identification and the measurement of risks in the financial sector is an important issue. Of course, reliable results about the effect of macroeconomic shock are most desirable. Of particular importance is, how the failure of single financial institutions could lead to system-wide contagion and domino effects. A crucial difficulty in this area is the complex structure of interactions between the various agents. Such network effects have been largely left unconsidered in economic research so far.

The aim of this research area is to contribute to a deeper understanding of the magnitude as well as the structure of risks in the financial sector and the dependencies between the various players in a globalized financial system. The main aspects considered are:

    • What is the role of the network structure of credit relations on the interbank market? How can we assess the robustness or fragility of   these network strucures?
    • How can volatility in financial markets be modelled in an appropriate manner?
    •  How can we develop more realistic behavioural models of financial markets with heterogeneous investors? How can we explain the regularities of financial prices on the base of behavioural models?
    • What is the explanatory power of market sentiment data and how can we integrate it into behavioural models?

 

"Network Effects and Systemic Risk in the Banking Sector" (funded under the Leibniz Community)

 

The global financial crisis starting in 2008 has stressed the importance of a well-functioning interbank market for the global economic system. The freezing especially of the short-term interbank market brought the world economy to the brink of collapse. The public, policy makers, regulatory authorities and scientists alike have since called for a better understanding of the stability of the global financial system and the systemic risk in the banking sector.

With the project “Network Effects and Systemic Risk in the Banking Sector”, funded by the Leibniz community, our group contributes to this challenge in multiple ways.

  • Network structure of banking systems. In order to develop an understanding of the stability and dynamic of banking systems it is paramount to first examine the underlying network structure. With respect to that, we try to answer in how far different banking networks exhibit comparable linking patterns. From time series of linking structures, we derive hypotheses about the linking behavior of individual institutions and test them empirically.
  • Stability of banking networks. By means of analytical approaches and simulations, our group examines the interplay of network structure and stability of banking networks. Apart from the network structure itself, we analyze the size distribution of bank balance sheets as well as the balance sheet structure.
  • Dynamic modelling of banking systems. Starting from known behavioral patterns of financial institutions, we develop dynamic models of banking systems. We use these in order to gain a better understanding of the long term developments in banking systems as well as system stability and reactions to exogenous shocks.

project description (pdf, english, 0.13 MB)

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