DS10 - Défi des autres savoirs

Econometric Methods for the Modelling of Multiple Risks – MultiRisk

Submission summary

The project MultiRisk (Econometric Methods for the Modelling of Multiple Risks) is a multi-disciplinary research project in the fields of financial econometrics and finance. MultiRisk brings together researchers in business, economics and mathematics. The aim of MultiRisk is to promote a better analysis of financial risk focused on three specific dimensions: market risk, liquidity risk and systemic risk. The measure of financial risk is one of the main research topics of financial econometrics. It is fundamentally related to the regulation policy issues. In particular, the post-crisis regulation (Basel 3, Financial Stability Board) highlights the importance of risk dependences and considers financial institutions as parts of a system. In this context, MultiRisk will propose new tools to measure and to manage the multiple risks in a multivariate and a systemic approach.
First, MultiRisk aims at developing new econometric methods to estimate the risk parameter in multivariate GARCH-type models. By estimating the risk parameter of the multivariate process of the risk factors, we will be able to take into account the dynamic interactions of the risk factors. The policy implications are obvious: by distinguishing the volatility shocks with persistent effects to those with temporary effects, one may expect time-varying risk measures leading to sufficiently large capital requirements in tumultuous periods and smaller capital requirements in low volatility periods.
Second, we will also consider the liquidity risk. Until recently, the liquidity of financial assets has typically been viewed as a second-order consideration in the asset-management industry. Liquidity was frequently associated with simple transaction costs that impose little effect, temporary if any, on asset prices and whose shocks could be easily diversified away. Yet, the evidence, especially the recent liquidity crisis, suggests that liquidity is now a primary concern. MultiRisk aims at proposing a static liquidity risk measure leading to a better evaluation of the latter risk by distinguishing the market volatility shocks with persistent effects from liquidity shocks with temporary effects. This approach will allow isolating the liquidity risk even in the case where volumes are not observed.
Finally, the recent financial crisis has also fostered extensive research on systemic risk, either on its definition, measurement, or regulation. Of particular interest is the identification of the financial institutions that contribute the most to the overall risk of the financial system -- the so-called Systemically Important Financial Institutions (SIFIs). Their identification relies on systemic risk measures which are generally based on market data and dynamic econometric models. However, the comparison of these systemic risk measures usually ignores the estimation risk. Furthermore, there is no validation test for these risk measures. Within this project, we aim at developing original and useful inference procedures. These tests will be designed to answer the following questions: how to validate these systemic risk measures? Which are the SIFI’s whose contribution to the systemic risk is significantly larger than that of the other firms?
MultiRisk gathers researchers with a strong background in the field of financial econometrics from three Universities. Beyond its scientific objectives, MultiRisk aims at promoting a reproducible econometric research. An important element of the project will be the development of interactive websites devoted to the econometrics of financial risks that will allow the professional and the academic community to beneficiate from the results of our research. These websites will be developed as a SaaS (Software as a Service) and will enable users to replicate our methodologies (test-estimation techniques) on their own data in a very simple way, through an Internet service.

Project coordinator

Monsieur Christophe HURLIN (Laboratoire d'Economie d'Orléans)

The author of this summary is the project coordinator, who is responsible for the content of this summary. The ANR declines any responsibility as for its contents.

Partner

CNRS - UMR9194 CREST (0507) CNRS - UMR 9194 Centre de Recherche en Economie et Statistique (CREST)
DRM Dauphine Recherche en Management
LEO Laboratoire d'Economie d'Orléans
CNRS - UMR9194 CREST (0507) CNRS - UMR 9194 Centre de Recherche en Economie et Statistique (CREST)

Help of the ANR 281,880 euros
Beginning and duration of the scientific project: September 2016 - 36 Months

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