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Measures of systemic risk and financial fragility in Korea

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Frame of Image prudential Analysis Department, The Bank of Korea, 110, Namdaemunro 3-Ga, Jung-Gu, Seoul, 100-794, Republic of Korea. Email: rjm728@bok.or.kr *** University Reader (Professor), Säid Business School and St. Edmund Hall, University of Oxford, Park End Street, Oxford, OX1 1HP, United Kingdom, Email: dimitrios.tsomocos@sbs.ox.ac.uk We are grateful to Gong Pil Choi, Charles Goodhart, Tae Soo Kang, Dae Sik Kim, Hoon Kim, Li Lin, Juan Francisco Martinez, Byung Hee Seong, Jong Suk Won and the participants of the “Systemic Risk and Financial Stability” seminar at the Bank of Korea in January 2012 for their helpful comments. We especially thank Seung Hwan Lee and Miguel Segoviano for providing us with excellent technical assistance and computer codes. However, all remaining errors are ours. This work is compiled with the financial support of the Bank of Korea. Dimitrios Tsomocos gratefully acknowledge the support and the hospitality of the Bank of Korea.
Contents
Ⅰ. Introduction ................................................................................................ 1 Ⅱ. Alternative definitions of financial fragility ............................................. 5 Ⅲ. Composite Financial Stability Index ......................................................... 8
1. Introduction ............................................................................................................ 8 2. Model ....................................................................................


Full Text
Title Measures of systemic risk and financial fragility in Korea
Similar Titles
Material Type Reports
Author(English)

Lee, Jong Han; Ryu; Jaemin; Tsomocos, Dimitrios P.

Publisher

[Seoul]:The Bank of Korea

Date 2012-08
Pages 60
Subject Country South Korea(Asia and Pacific)
Language English
File Type Documents
Original Format pdf
Subject Economy < Financial Policy
Holding The Bank of Korea; KDI School

Abstract

This paper provides a quantitative metric for financial stability of Korean banking system based on the Tsomocos (2003a, b) model, for which we use market data as proxies for probabilities of default and equity valuation of the banking sector. We estimate the effect of the probability of default and the equity valuation of the banking sector on real output in order to measure the financial fragility using a vector error correction model (VECM). In addition, we estimate the contributions of individual banks to systemic risk using CoVaR and MES (Marginal Expected Shortfall). CoVaR is estimated based on the methodology of Adrian and Brunnermeier (2010), and MES is estimated based on Shapley value methodology which has been introduced by Tarashev, Borio and Tsatsaronis. (2010).