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The impact of uncertainty and risk measures

Abstract

This dissertation seeks to better understand how uncertainty impacts a variety of economic activities and how to measure systemic risk. In the first chapter, "The effects of oil price uncertainty on the macroeconomy'' focuses on oil price uncertainty, and how it affects the global economic growth. In particular, I define oil price uncertainty as the time-varying standard deviation of one- quarter ahead forecasting error that follows stochastic volatility. Then I use a quarterly VAR with stochastic volatility in mean to examine the effect of oil price uncertainty. Stochastic volatility allows for the separation of effects of the oil price uncertainty from the level, and thus enables the examination of an oil price uncertainty shock in a flexible yet tractable way. One important contribution of this chapter is that it makes significant improvements in recovering an more accurate historical uncertainty series by incorporating a realized volatility series from daily oil price data to the main VAR as an additional oil price uncertainty indicator. The estimation result suggests that apart from the changes in oil price level, an oil price uncertainty shock alone has negative effects on both global and advanced economies' industrial production growth. Next I move on to the propagation of uncertainty in the financial sector of the economy in the second chapter, "Bank lending and loan securitization under uncertainty". This chapter analyzes how US commercial banks adjust lending activities in response to macroeconomic uncertainty with a focus on asset securitization. During 2001Q2-2009Q3, macroeconomic uncertainty has been negatively related to the loan growth rate. In addition, comparing banking institutions with and without asset securitization, I find that loan growth rate of asset-securitizing banks was not particularly protected from the increase in uncertainty, which implies that securitization did not effectively help transfer aggregate risk from the banking sector to investors. I postulate factors that may have contributed to the ineffective risk transfer of securitization; one important reason is due to the banks' credit exposure through explicit/implicit recourse and/or seller-provided credit enhancements which also fluctuate with the changes in the macroeconomic uncertainty level. My final dissertation chapter surveys the recent literature on the systemic risk measures in the purpose of better understanding the concept of systemic risk in relation with financial stability. In "Financial stability and systemic risk: a survey of systemic risk measure", I start from "model-free" measure of CoVaR, an extension of Value-at-Risk to quantify the contribution of an individual entity to systemic risk, that can be used and applied to practice very easily and flexibly. Then, I introduce GARCH-based measure, SRISK, whose main goal is to quantify the expected capital shortfall of a firm given that the financial sector is in distress. Next, I look at the measures rooted in the CDS pricing model, one of which attempts to capture systemic risk among sovereigns. Finally, I review the recent development that brings in the rare event, i.e., systemic risk crisis, into the DSGE framework with the intermediary sector

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