An official website of the United States government
Life insurers' business model has changed with the growth of insurance products with minimum return guarantees that are exposed to market and interest risks. The interest risk exposure of US and European insurers increased in the low-rate environments after the global financial crisis and the European sovereign debt crisis, respectively. The relative fragility of life insurers is highly persistent across the global financial crisis, the European sovereign debt crisis, and the COVID-19 crisis. European insurers with a higher share of liabilities with minimum return guarantees in 2016 had lower stock returns during the COVID-19 crisis.
more »
« less
SYSTEMIC RISK: THE EFFECT OF MARKET CONFIDENCE
In a crisis, when faced with insolvency, banks can sell stock in a dilutive offering in the stock market and borrow money in order to raise funds. We propose a simple model to find the maximum amount of new funds the banks can raise in these ways. To do this, we incorporate market confidence of the bank together with market confidence of all the other banks in the system into the overnight borrowing rate. Additionally, for a given cash shortfall, we find the optimal mix of borrowing and stock selling strategy. We show the existence and uniqueness of Nash equilibrium point for all these problems. Finally, using this model we investigate if banks have become safer since the crisis. We calibrate this model with market data and conduct an empirical study to assess safety of the financial system before, during after the last financial crisis.
more »
« less
- Award ID(s):
- 1736414
- PAR ID:
- 10349364
- Date Published:
- Journal Name:
- International Journal of Theoretical and Applied Finance
- Volume:
- 23
- Issue:
- 07
- ISSN:
- 0219-0249
- Page Range / eLocation ID:
- 2050043
- Format(s):
- Medium: X
- Sponsoring Org:
- National Science Foundation
More Like this
-
-
Abstract I show that a disruption to the financial sector can reshape the patterns of global trade for decades. I study the first modern global banking crisis originating in London in 1866 and collect archival loan records that link multinational banks headquartered there to their lending abroad. Countries exposed to bank failures in London immediately exported significantly less and did not recover their lost growth relative to unexposed places. Their market shares within each destination also remained significantly lower for four decades. Decomposing the persistent market-share losses shows that they primarily stem from lack of extensive-margin growth, as the financing shock caused importers to source more from new trade partnerships. Exporters producing more substitutable goods, those with little access to alternative forms of credit, and those trading with more distant partners experienced more persistent losses, consistent with the existence of sunk costs and the importance of finance for intermediating trade.more » « less
-
The occurrence of extreme events, either natural or man-made, puts stress on both the physical infrastructure, causing damages and failures, and the financial system. The following recovery process requires a large amount of resources from financial agents, such as insurance companies. If the demand for funds overpasses their capacity, these financial agents cannot fulfill their obligations, thus defaulting, without being able to deliver the requested funds. However, agents can share risk among each other, according to specific agreements. Our goal is to investigate the relationship between these agreements and the overall response of the physical/financial systems to extreme events and to identify the optimal set of agreements, according to some risk-based metrics. We model the system as a directed and weighted graph, where nodes represent financial agents and links agreements among these. Each node faces an external demand of funds coming from the physical assets, modeled as a random variable, that can be transferred to other nodes, via the directed edges. For a given probabilistic model of demands and structure of the graph, we evaluate metrics such as the expected number of defaults, and we identify the graph configuration which optimizes the metric. The identified graph suggests to the agents a set of agreements to minimize global risk.more » « less
-
This paper incorporates banks and banking panics within a conventional macroeconomic framework to analyze the dynamics of a financial crisis of the kind recently experienced. We are particularly interested in characterizing the sudden and discrete nature of banking panics as well as the circumstances that makes an economy vulnerable to such panics in some instances but not in others. Having a conventional macroeconomic model allows us to study the channels by which the crisis affects real activity both qualitatively and quantitatively. In addition to modeling the financial collapse, we also introduce a belief driven credit boom that increases the susceptibility of the economy to a disruptive banking panic.more » « less
-
Phillip Bradford, S. Andrew (Ed.)The stock market is as volatile as it is unpredictable, the unstable nature of the stock market results in fluctuations in stock prices and invariably, the market performance of stocks. Understanding the underlying factors that contribute to the volatility of the stock market, which has its consequences on stock prices, has become important to researchers and investors alike. Some of the methods that researchers have used in the past as a gauge for understanding market performance include analyzing economic conditions, understanding company performance, following geopolitical events and market trends. To contribute to the vast research field of stock price predictions and the challenge of understanding stock price fluctuations, this study will aim to find a relationship between human sentiments on the social media platform, Reddit, and the S&P 500 stock index. In this study, we will analyze posts from five subreddits that typically discuss the stock market and stock price fluctuations. This will form the first part of our dataset. Historical stock prices for the S&P 500 index will be obtained from Yahoo Finance. This will form our final dataset. Using VADER (Valence aware dictionary and sentiment reasoner), we will extract the sentiments within the five subreddits and categorize them into positive and negative sentiments. The historical stock prices from Yahoo finance will be matched with the aggregate sentiments for each day and this data passed through the LSTM model for training. Our findings provide strong evidence of social media’s impact on stock price predictions.more » « less
- Free Publicly Accessible Full Text
-
Accepted Manuscript1.0
- Journal Article:
- https://doi.org/10.1142/S0219024920500430
