Essays on Financial Risk Management
thesisposted on 05.02.2020 by Chi T. M. Tran
In order to distinguish essays and pre-prints from academic theses, we have a separate category. These are often much longer text based documents than a paper.
This thesis comprises three essays on systemic risk using a computational approach for the first two chapters and statistical analysis for the third. Chapter 1 uses an agent-based model to determine whether the stability of a financial system can be improved by incorporating BCVA into the pricing of OTC derivative contracts. The results illustrate that the adjustments of financial institutions credit can not only improve the stability of financial counter-parties in credit events but can also reduce systemic risk in the entire network. The scale of the benefit is dependent upon the leverage of institutions and is significantly affected by connectivity and the premium of derivative contracts. Chapter 2 investigates systemic risk in an agent-based model with collateral commitments. Market prices of collateral are calculated by optimisation functions of financial institutions' efficiency. The experiments indicate that the value adjustments (xVA) is more effective at eliminating financial systemic risk than by incorporating only BCVA. However, this effect is unclear in systems of weak infrastructure. The benefit of xVA is also reduced by large exogenous shocks. Similarly, the market prices of collateral decline under high leverage or large premiums because there serves for value adjustments limit financial funding of counter-parties. Asset traders can only offer lower bid-ask prices. Chapter 3 tests the effectiveness of Basel III liquidity standards to enhance the stability of the banking sector. The analyses provide significant evidence that the long-term liquidity regulation of NSFR exacerbates bank profitability and fragility, especially for large banks. Short-term liquidity standard, also known as LCR, has a positive influence on ROAA but a negative impact on bank risk-taking. Nonetheless, these effects are economically insignificant. The Basel III regulations are therefore ineffective at improving bank strength; indeed they reduce bank performance.