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Endogenous and Systemic Risk

Endogenous and Systemic Risk

Chapter:
(p.72) (p.73) 2 Endogenous and Systemic Risk
Source:
Quantifying Systemic Risk
Author(s):
Jon DanielssonHyun Song ShinJean-Pierre Zigrand
Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226921969.003.0004

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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