Modeling and Measuring Systemic Risk in Financial Markets

A modern financial system has a complex and dynamic nature formed by a noncentralized set of decision-makers and evolves through their interactions. Through the resulting inter-dependencies, financial distresses may cause or intensify system-level losses for individual stakeholders or even lead to financial crises and/or economic depression. The principal aim of this dissertation is to establish a normative framework supporting policy-level decisions related to systemic risk in financial markets. The proposed framework provides the analytical tools and optimization formulations needed in the design of regulatory policies to prevent and mitigate systemic risk, addressing the inefficiency and unintended consequences of conventionally developed regulatory rules and policies.
We use a systems theoretic approach that can capture the systemic nature and behavior of financial markets towards an alternative normative framework on systemic risk in financial markets. We apply this approach for modeling and measuring systemic risk to provide a basis for an incentive-compatible regulatory design framework.