Extreme Value Theory with an Application to Bank Failures through Contagion

This study attempts to quantify the shocks to a banking network and analyze the transfer of shocks through the network. We consider two sources of shocks: external shocks due to market and macroeconomic factors which impact the entire banking system, and idiosyncratic shocks due to failure of a single bank. The external shocks will be estimated by using two methods: (i) non-parametric simulation of the time series of shocks that occurred to the banking system in the past, and (ii) using the extreme value theory (EVT) to model the tail part of the shocks. The external shocks we considered in this study are due to exchange rate and treasury bill rate volatility. Also, an ARMA/GARCH model is used to extract iid residuals for this purpose. In the next step, the probability of the failure of banks in the system is studied by using Monte Carlo simulation. We calibrate the model such that the network resembles the Canadian banking system.

Grantor dc:publisher

Université d'Ottawa / University of Ottawa

Year dc:date

2011

Author dc:creator

• Nikzad, Rashid

Contributors dc:contributor

• McDonald, David

• GARCH
• Extreme Value Theory
• Banking Network
• Monte Carlo simulation

Language dc:language

en

Identifier

http://dx.doi.org/10.20381/ruor-4871

OAI identifier oai:identifier

oai:ruor.uottawa.ca:10393/20279