Monetary stability

What is systemic risk?

Possibility that at least several banks will collapse, Situation in which default of one participant of financial system causes defaults of other participants, which leads to chain effect causing financial troubles

What is financial crisis?

State of disequilibrium in financial market characterized by lack of liquidity

What is financial stability?

Lack of financial crisis, State in which financial system fulfills all its functions in continuous and effective way, also in the case of unexpected and negative shocks at large scale, Ability to support economic processes, risk management and shock absorption.

What is expected shortfall?

Present Value of the part of debt which is not backed by assets in the case of default

What measures of risk of banking sector depend on?

-Capitalization of bank –the higher, the lower risk, Volatility of assets –the higher, the higher risk, Correlation of assets –the higher, the higher risk

What are the measures of risk in banking sector?

probability that group of banks will collapse, probability that fraction of the banks will collapse, expected shortfall

What are characteristics of price stability?

simple administrative procedure, standard forecasts, accountable, instruments of control, measurable

What are characteristics of financial stability?

hardly measurable, not accountable, forecasted by stress tests and simulations, difficult administrative procedure

Why measure financial stability?

1. It is easier to define, measure, model, analyse etc 2. problem of measurement should have priority as we need to compare and analyse 3. we need a formal, model-based definition

How financial fragility is characterised?

It is characterised by reduced bank profitability and increased aggregate default.

what bank profitability and increased aggregate default is linked to?

welfare losses

What is volatility?

measure reflecting changes of some index in the specified period, for example: stock prices, market index values, interest rates, exchange rates, commodity prices, etc.

What usually is taken for a measure of volatility?

standard deviation of returns

What is historical volatility?

volatility determined on the basis of historical data

What is implied volatility?

volatility determined from option prices

What is forecasted volatility?

volatility for future period

What is Realized volatility?

volatility of past period

What volatility is related to?

to particular period, for example daily, monthly annual. This allows us to determine term structure of volatility –for each time period volatility is determined

What is volatility clustering?

large changes are followed by large changes, small changes are followed by small changes

Name some volatility properties?

Volatility is mean reverting, Positive and negative shocks have asymmetric impact on volatility, Price changes and volatility are negatively correlated, Changes of volatility on the different markets are positively correlated

What are the two groups of historical volatility models?

Simple estimators, Estimators in financial econometrics models

What Estimator of Anderson is?

o called integrated volatility –sum of logarithmic returns determined for short intraday intervals, Considered as a benchmark for simple volatility estimators

What is EWMA (Exponentially Weighted Moving Average)?

JP Morgan in Riskmetrics Estimated sequentially as weighted average of previous variance and current squared deviation from mean

What is Model GARCH

Generalized AutoRegressive Conditional Heteroscedasticity

What is VIX?

This is monthly volatility, calculated by using prices of options on S&P 500, with different strikes.

What are fear indices?

volatility indices

Name some volatility indices?

VXN (NASDAQ 100), VXD (DJIA), RVX (Russell 2000)