Computing the Probability of a Financial Market Failure: A New Measure of Systemic Risk
Published in Annals of Operations Research, 2022
Recommended citation: Jarrow, R., Protter, P., Quintos, A. Computing the Probability of a Financial Market Failure: A New Measure of Systemic Risk. Ann Oper Res (2022). https://doi.org/10.1007/s10479-022-05146-9
This paper characterizes the probability of a market failure defined as the simultaneous default of two globally systemically important banks (G-SIBs), where the default probabilities are correlated. The characterization employs a multivariate Cox process across the G-SIBs. Various theorems related to market failure probabilities are derived, including the impact of increasing the number of G-SIBs in an economy and changing the initial conditions of the economy’s state variables.