systemic risk in financial systems a feedback approach abstract we develop an innovative framework to estimate systemic risk that accounts for feedback effects between the real and financial sectors we model the feedback effects through successive deterioration of borrowers creditworthiness and illiquidity spreading thus giving rise to a micro level financial accelerator between firms and banks we demonstrate that the model converges to a unique fixed point and the key role that centrality plays in shaping the level of amplification of shocks we also provide a mathematical framework to explain systemic risk variations in time as a function of the network characteristics of economic agents finally we supply empirical evidence on the economic significance of the feedback effects on comprehensive loan level data of the brazilian credit register our results corroborate the importance of incorporating new contagion channels besides the traditional interbank market in systemic risk models

the inherent inefficiency of simultaneously feasible financial transmission rights auctions abstract empirical evidence from the new york iso shows that the clearing prices for point to point congestion revenue rights also known as financial transmission rights ftrs resulting from centralized auctions conducted by independent system operators differ significantly and systematically from the realized congestion revenues that determine the accrued payoffs of these rights the question addressed by this paper is whether such deviations are due to price discovery errors which will eventually vanish or due to inherent inefficiencies in the auction structure we show that even with perfect foresight of average congestion rents the clearing prices for the ftrs depend on the bid quantity and therefore may not be priced correctly in the financial transmission right ftr auction in particular we prove that quantity limits on the ftr bids may cause the auction clearing prices to differ from the bid prices this phenomenon which is inherent in the theoretical properties of the optimization algorithm used to clear the auction is further illustrated through numerical simulations with test systems we conclude that price discovery alone would not remedy the discrepancy between the auction prices and the realized values of the ftrs secondary markets or frequent reconfiguration auctions are necessary in order to achieve such convergence

network models and financial stability abstract systemic risk is a key concern for central banks charged with safeguarding overall financial stability in this paper we investigate how systemic risk is affected by the structure of the financial system we construct banking systems that are composed of a number of banks that are connected by interbank linkages we then vary the key parameters that define the structure of the financial system including its level of capitalisation the degree to which banks are connected the size of interbank exposures and the degree of concentration of the system and analyse the influence of these parameters on the likelihood of knock on defaults first we find that the better capitalised banks are the more resilient is the banking system against contagious defaults and this effect is non linear second the effect of the degree of connectivity is non monotonic i e initially a small increase in connectivity increases the contagion effect but after a certain threshold value connectivity improves the ability of a banking system to absorb shocks third the size of interbank liabilities tends to increase the risk of knock on default even if banks hold capital against such exposures fourth more concentrated banking systems are shown to be prone to larger systemic risk all else equal in an extension to the main analysis we study how liquidity effects interact with banking structure to produce a greater chance of systemic breakdown we finally consider how the risk of contagion might depend on the degree of asymmetry tiering inherent in the structure of the banking system a number of our results have important implications for public policy which this paper also draws out

capital gains and after tax internal rates of return net present value models are constructed by discounting the after tax cash flows of a challenging investment by the after tax internal rates of return irrs of a defending investment after tax irrs calculated for a defending investment are shown to depend on the defender s capital gains and allowable depreciation the often recommended adjustment to the before tax irrs of one minus the marginal income tax rate is not generally applicable failure to correctly adjust the discount rates the defender s irrs for taxes may result in incorrect inferences from comparative static models and incorrect investment valuations from empirical models tax rate adjustments for farmland stocks and bonds are shown to be different and to have varied over time

stochastic modeling of financial electricity contracts abstract we discuss the modeling of electricity contracts traded in many deregulated power markets these forward futures type contracts deliver either physically or financially electricity over a specified time period and is frequently referred to as swaps since they in effect represent an exchange of fixed for floating electricity price we propose to use the heath jarrow morton approach to model swap prices since the notion of a spot price is not easily defined in these markets for general stochastic dynamical models we connect the spot price the instantaneous delivery forward price and the swap price and analyze two different ways to apply the heath jarrow morton approach to swap pricing either one specifies a dynamics for the non existing instantaneous delivery forwards and derives the implied swap dynamics or one models directly on the swaps the former is shown to lead to quite complicated stochastic models for the swap price even when the forward dynamics is simple the latter has some theoretical problems due to a no arbitrage condition that has to be satisfied for swaps with overlapping delivery periods to overcome this problem a practical modeling approach is analyzed the market is supposed only to consist of non overlapping swaps and these are modelled directly a thorough empirical study is performed using data collected from nord pool our investigations demonstrate that it is possible to state reasonable models for the swap price dynamics which is analytically tractable for risk management and option pricing purposes however this is an area of further research

estimating systemic risk in the international financial system this paper develops three distinct methods to quantify the risk of a systemic failure in the global banking system we examine a sample of 334 banks representing 80 of global bank equity in 28 countries around five global financial crises our results suggest statistically significant but economically small increases in systemic risk although policy responses are endogenous the low estimated probabilities suggest that the distress of central bankers regulators and politicians about the events we study could be overstated and that current policy responses to financial crises could be adequate to handle major macroeconomic events

sulfur dioxide control by electric utilities what are the gains from trade title iv of the 1990 clean air act amendments caaa established a market for transferable sulfur dioxide so2 emission allowances among electric utilities this market offers firms facing high marginal abatement costs the opportunity to purchase the right to emit so2 from firms with lower costs and this is expected to yield cost savings compared to a command and control approach to environmental regulation this paper uses econometrically estimated marginal abatement cost functions for power plants affected by title iv of the caaa to evaluate the performance of the so2 allowance market specifically we investigate whether the much heralded fall in the cost of abating so2 compared to original estimates can be attributed to allowance trading we demonstrate that for plants that use low sulfur coal to reduce so2 emissions technical change and the fall in prices of low sulfur coal have lowered marginal abatement cost curves by over 50 percent since 1985 the flexibility to take advantage of these chan

cash rents and land values in u s agriculture a firm level land valuation model is deduced which depends on the expected growth rate in net cash returns to land inflation expectations and property income and capital gains taxes it is then aggregated to obtain an aggregate two sector land valuation model that model is then estimated for twenty four individual states for the period 1960 81 in addition a pooled cross sectional regression model is estimated combining the twenty four state data the model results demonstrate that significant state differences exist in the land market and that in many states agricultural land values are influenced by nonagricultural demand for land

contagion and risk sharing on the inter bank market abstract increasing inter bank lending has an ambiguous impact on financial stability using a computational model with endogenous bank behavior and interest rates we identify the conditions under which inter bank lending promotes stability through risk sharing or provides a channel through which failures may spread in response to large economy wide shocks more inter bank lending relationships worsen systemic events for smaller shocks the opposite effect is observed as such no inter bank market structure maximizes stability under all conditions in contrast deposit insurance costs are always reduced under greater numbers of inter bank lending relationships a range of regulations are considered to increase system stability

an analysis of growth of u s farmland prices 1963 82 increases in expected inflation or real growth in net rental income to land have been proposed as alternative explanations of the dramatic real growth in u s farmland prices in the 1970s in this paper the effect of inflation is shown to be theoretically ambiguous an empirical analysis using u s and international farmland prices suggests that most of the real land price growth can be explained by real growth in net rental income to land increases in expected inflation have had a negative effect on real land prices but the effect of inflation has been comparatively small

financial fragility and distress propagation in a network of regions we investigate how the financial fragility in the real economy is affected by the average level of interdependence among agents across different regions of the economy to this end we develop a parsimonious agent based model of firms and banks organized in geographic regions the model is built on the framework of an existing class of models for business fluctuations the goal of our exercise is to clarify the effect on systemic failures of the interplay between network interconnectedness and financial acceleration in particular we investigate the probability of individual and systemic failures with varying levels of interconnectedness we find that in the absence of financial acceleration connectivity makes the system more resilient in contrast in the presence of financial acceleration the probability of both individual and systemic failures are minimized at intermediate level of diversification

agricultural income tax expenditures a microeconomic analysis annual agricultural tax expenditures tax subsidies for farms in the sample increased dramatically from 2 430 in 1967 72 to 8 590 in 1973 78 tax expenditures were beneficial to all major enterprises and farm sizes while large farmers received nearly three times the value of small farm tax savings small farmers received more tax expenditures per dollar of farm sales tax progressivity declined during the sample period based on adjusted gross and economic measures of income and combined state income and self employment taxes exceeded federal income taxes during 1973 78 also tax expenditures far exceeded direct government payments to sample farmers during 1973 78

efficiency of financial transmission rights markets in centrally coordinated periodic auctions electricity market design in the united states is increasingly dominated by locational marginal pricing lmp of energy and transmission lmp markets are typically coupled with periodic auctions of financial transmission rights ftrs to hedge transmission price risks while lmp designs offer considerable advantages forward price discovery in these markets requires participants to form efficient expectations on spot congestion price differences in this paper we examine trends in the efficiency of one of the early lmp markets the new york independent system operator nyiso analyzing a panel data set of over 9000 contracts over a six year period beginning september 2000 we show that nyiso ftr markets were inefficient in their early years but that market participants learned to predict forward prices and thus efficiency improved for ftrs not solely within the new york city long island sub region ftrs within this sub region which has a number of special characteristics remain relatively inefficient

an empirical study of the mexican banking system s network and its implications for systemic risk abstract with the aim to measure and monitor systemic risk we present some topological metrics for the interbank exposures and the payments system networks the evolution of such networks is analyzed we draw important conclusions from the systemic risk s perspective and propose a measure of interconnectedness additionally we suggest non topological measures to describe individual behavior of banks in both networks the main findings of this paper are the structures of the payments and exposures networks are different in terms of connectivity the topology of the exposures network changed after the collapse of lehman brothers whereas the structure of the payments network does not the proposed measure of interconnectedness can be used to determine the importance of a bank in terms of connectivity finally we found that interconnectedness of a bank is not necessarily related with its assets size but it is linked to the contagion it might cause

evaluating systemic risk using bank default probabilities in financial networks in this paper we propose a novel methodology to measure systemic risk in networks composed of financial institutions our procedure combines the impact effects obtained from stress measures that rely on feedback centrality properties with the default probabilities of institutions we also present new heuristics for designing feasible and relevant stress testing scenarios that can subside regulators in financial system surveillance tasks we develop a methodology to extract banking communities and show that these communities have a relevant effect on systemic risk we find that these communities are mostly composed of non large banks suggesting that regulators should also broaden their surveillance efforts to these banking communities other than to the usual sifis and large banks finally our results provide insights and guidelines for policymakers

systemic risk financial contagion and financial fragility abstract although it is hard to arrive at a widely accepted definition for systemic risk it is generally acknowledged that it is the risk of the occurrence of an event that threatens the well functioning of the system of interest financial payments banking etc sometimes to the point of making its operation impossible we model systemic risk with two main components a random shock that weakens one or more financial institutions and a transmission mechanism which transmits and possibly exacerbates such negative effects to the rest of the system our model could be conceptually represented by a network already described in previous works in this work we show how is possible to estimate the distribution of losses for the banking system with our model additionally we show how it is possible to separate the distribution of losses into two components the losses incurred by the initial shock and the losses resulting from the contagion process finally once the distribution is estimated we can derive standard risk measures for the system as a whole another important contribution of this work is that we can follow the evolution of certain risk measures like the expected loss or the cvar in order to evaluate if the system is becoming more or less risky in fact more or less fragile additionally we can decompose the distribution of losses of the whole banking system into the systemic and the contagion elements and we can determine if the system is more prone to experience contagious difficulties during a certain period of time

firm network characteristics and economic robustness to natural disasters this article proposes a theoretical framework to investigate economic robustness to exogenous shocks such as natural disasters it is based on a dynamic model that represents a regional economy as a network of production units through the disaggregation of sector scale input output tables results suggest that disaster related output losses depend on direct losses heterogeneity and on the economic network structure two aggregate indexes concentration and clustering appear as important drivers of economic robustness offering opportunities for robustness enhancing strategies modern industrial organization seems to reduce short term robustness in a trade off against higher efficiency in normal times c 2011 published by elsevier b v

valuation of physical transmission rights an analysis of electricity cross border capacities between germany and the netherlands abstract the purpose of this paper is to discuss market coherent valuation of physical transmission rights for cross border capacities between germany and the netherlands aiming at a fair valuation of these contracts the most important stylized facts of electricity prices such as mean reversion spikes and correlations of regional prices have to be considered we present different approaches to the valuation of physical transmission rights and perform a quantitative analysis of the results on the one hand various challenges of modeling regional price spreads are analyzed on the other hand we indicate a structural undervaluation of physical transmission rights in all model constellations i e market prices are below theoretical prices of ptr s flexibility we discuss several reasons for this undervaluation and finally state that regulatory modifications have to be made to avoid missing incentives for the extension of cross border capacities

systemic risk and bank size abstract in this paper we analyse firm level systemic risk for us and european banks from 2004 to 2012 we observe that common systemic risk indicators are primarily driven by firm size which implies an overriding concern for too big to fail institutions however smaller banks may still pose considerable systemic threats as exemplified by the northern rock debacle in 2007 by introducing a simple standardisation we obtain new risk measures that often prove to be superior predictors of financial distress during the 2007 2009 subprime crisis we conclude that the new measures could be a valuable addition to the existing indicators employed in basel iii to identify systemically important banks

an assessment of the danish german cross border auctions abstract this paper presents an analysis of the auction prices at the cross border auction between west denmark and germany and between east denmark and germany the kontek cable monthly and annual transmission capacities appear to be more highly valued than daily transmission capacity on average the two cross border auctions show different trends the auctions between west denmark and germany exhibit a higher level of prices in the southbound direction and between east denmark and germany higher prices in the northbound direction we find a relatively strong correspondence in the pricing of products over different time frames daily monthly and annual auctions between west denmark and germany and a weak correspondence for the products between east denmark and germany in the daily auctions market players can decide whether to use their capacity after the clearing of the day ahead market while in the monthly and annual auctions they must decide whether to use their capacity prior to clearing if they choose not to use their capacity the use it or lose it principle applies the capacity is then subsequently released to the daily market since the daily cross border auctions are free of commitment they should be valued as options likewise in the monthly and annual auctions market players can choose not to nominate their capacity but as this must occur before the clearing of the day ahead market they will not know the directions of the power flows a priori if they nominate the capacity they must use it if the direction turns out to be wrong it is then possible to purchase capacity in the opposite direction in the daily auctions if market players can accurately predict the outcome of the spot markets day ahead the value of monthly and annual capacity should more closely reflect the value of an option thus one would expect the value of the monthly and annual capacity to be between the value of an option and an obligation although this suggests that the average price of daily capacity should be greater than monthly and annual capacity our data do not support this hypothesis the daily monthly and annual capacity auctions do not reflect the value of the underlying asset as specified by the appropriate valuation of the energy price differentials between west denmark and germany and east denmark and germany therefore market players are exposed to substantial variation in fees for congestion management on the cross border we study whether arbitrage improves over time and discern no obvious trend since the explicit auction procedure has not been cost efficient a better approach appears to be the new market coupling arrangement introduced on the kontek cable and on the border between west denmark and germany with the result that market players will pay a congestion management fee i e area price difference equal to the energy price differential resulting from the market coupling mechanism

implicit auctioning on the kontek cable third time lucky implicit auctioning in europe is about eliminating cross border trade inefficiencies by internalizing crossborder trade into the day ahead auction procedures of the power exchanges that are already organizing trade nationally on the kontek cable implicit auctioning has first been implemented with no coupling between the relevant power exchanges followed by a volume coupling implementation and finally a one way price coupling implementation that is still operational today the main contribution of this paper is to compare the theoretical properties of these three implementations and to analyze their performance empirically we find that the third implementation is significantly outperforming the previous two implementations but in this third implementation stakeholders partly abandoned the volume coupling approach they initially believed to be a viable alternative and institutionally easier to implement

financial contagion and economic development an epidemiological approach abstract we develop an epidemiological approach to analyze how financial contagion may affect and be affected by economic activity we show that according to specific parameter values the economy may converge either to a non speculative or to a speculative equilibrium in the former situation the level of per capita income is maximal while in the latter it is reduced by financial contagion the presence of economic and financial feedback effects may also give rise to macroeconomic fluctuations during the transitional path clearly showing that such economic and financial links are an important driver of the short run macroeconomic performance by extending the analysis to a spatial dimension we also show that financial contagion in some specific region may propagate quickly also in regions far away from those in which the contagion initially occurs highlighting the role of regional policy coordination to avoid interregional contagion