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Contagion Effect among Financial Institutions and Sovereign Credit Default Swap of Pakistan; State Dependent Sensitivity Analysis Value at risk Ap...

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1.Introduction:
In developing countries the major driver of economic growth are financial institutions, which are interlinked through innovation in response to the forces of globalization and technology. Rigorous risk management efforts are made to strengthen the financial bodies and economy.
The three possible channel of financial stress spread from one financial institution to the remainder of financial organization are: other party vulnerability, capital markets linkages, and investor confidence. Prices, nevertheless, specify an innate way of measuring the interconnection amongst institutions by all three-risk diffusion means (Monks & Stringa, 2005).
Commencing since the mid-1990s a measure of risk recognized as value-at-risk (VaR) has appeared as the prevalent risk measure for financiers in financial securities, banks and investment companies and the controlling powers that standardize these institutions. VaR is also an important part of both the Basel I and Basel II suggestions upon banking rules published by the Basel Committee on Banking Supervision. Security and Exchange Commission of Pakistan (SECP) also emphasized the significance of VaR measures for financial institutions to quantity the risk.
The global financial crisis made regulators and researcher realize that systemic risk and their spread outs are misjudged in majorly applied risk procedures and that conventional risk measuring instruments, like value-at-risk (VaR), must be fine-tuned fitting to states of market to disclose risk in a better way. (Adams, Fuss, & Gropp, 2013). Measuring risk through VaR has the advantage that it reflects all risk relevant shocks of an institution that result from complex relationship of financial institutions.
For measuring risk ...

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