Measuring Systemic Risk using Contingent Claims Analysis (CCA)

This paper dwells upon the contingent claims analysis (CCA) framework in order to quantify the risk of financial distress at the level of the sectors of economy (banking, sovereign and corporate sector). After the CCA risk indicators have been obtained for the three analyzed sectors, a global VAR is constructed for the analysis of spillover effects among the Central and Eastern European countries by determining whether a shock in one sector of a country would have a significant effect on the other analyzed sectors and countries and, especially, on the contraction of economic growth. In order to analyze the impact and spillover of shocks across sectors and countries, adverse shock scenarios are developed, particularly regarding the banking and sovereign risk. The methodology is applied on four Central and Eastern European Countries: Romania, Bulgaria, Hungary and Poland.