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Endogenous and Systemic Risk

Endogenous and Systemic Risk

(p.72) (p.73) 2 Endogenous and Systemic Risk
Quantifying Systemic Risk
Jon DanielssonHyun Song ShinJean-Pierre Zigrand
University of Chicago Press

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 suggests 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. Two commentaries are also included at the end of the chapter.

Keywords:   market volatility, traders, risk perception, Basel II, bank capital, derivatives clearing

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