Market-Implied Systemic Risk and Shadow Capital Adequacy

Measure of systemic risk in the interbank market in Iran by buffer capital and hyperlink-induced topic search algorithm

Considering that the interbank market is considered as a night market to provide short-term liquidity to banks, one of the most important risks in this market - due to the short-term nature of transactions in this market - is systemic risk. Exercising this risk cycle will have devastating effects on monetary policymakers, such as the 2007-2009 crisis.  In this study, first, the buffer capital ...

Credit Risk and the Role of Capital Adequacy Regulation

Using the industrial organization approach to the microeconomics of banking we model a large (Monti-Klein) bank which is risk neutral and faces credit uncertainty in its loan business. The impact of capital adequacy regulation and the effect of changes in risk on deposit and loan rates are analyzed. We then show that capital adequacy regulation induces the bank to behave as if it were risk aver...

Option-Implied Correlations, Factor Models, and Market Risk∗

Implied correlation and variance risk premium stand out in predicting market returns. However, while the predictive ability of implied correlation lasts for up to a year, the variance risk premium predicts market returns only for one quarter ahead. Contrary to the accepted view, implied correlation predicts the market return not through a diversification risk (average correlation) channel, but ...

Limited Capital Market Participation and Human Capital Risk

The non-tradability of human capital is often cited for the failure of traditional asset pricing theory to explain agents’ portfolio holdings. In this paper we argue that the opposite might be true — traditional models might not be able to explain agent portfolio holdings because they do not explicitly account for the fact that human capital does trade (in the form of labor contracts). We deriv...

New Capital Adequacy Framework