Endogenous and Systemic Risk
Chapter in NBER book Quantifying Systemic Risk (2013), Joseph G. Haubrich and Andrew W. Lo, editors (p. 73 - 94)
This chapter, which examines the feedback between market volatility and traders' perception of risk, spells out the precise mechanism through which endogenous risk manifests itself, and discusses ways of mitigating it. It considers a variety of markets, explaining the implied volatility skew for options, the procyclical impact of Basel II bank capital requirements, and the optimal design for derivatives clearing and lenders of last resort.
This paper was revised on August 29, 2014
Document Object Identifier (DOI): 10.7208/chicago/9780226921969.003.0004Commentary on this chapter:
Comment, Bruce Mizrach
Comment, Terence C. Burnham
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