THREE ESSAYS ON BANKING RISKS AND INFLATION DYNAMICS

In the aftermath of the recent financial crisis of 2008, policymakers and researches has stirred a movement of economic researches on the determinants, impacts, and control of the crisis. There has been limited work on the banks’ size and risk relationship and the determinants of systemic risk contribution. This dissertation investigates these two sub-areas to help strengthen future financial sector risk and factors behind the deflation in Europe during 2014.This dissertation contains three chapters. First paper titled ”Do Big Banks Take on More Risks? Some Evidence on Whether Bank Size and Risk Relationship Matters”. I examine the relationship between the bank size - structure and three major banks risks: liquidity risk, credit risk, and market risk. I use pro-forma based data sample of virtually largest fifty US commercial banks during the period 1994-2013. The results show that institutions with higher risk exposure have a larger size, less capital, and greater reliance on purchased funds. Banks related to significantly reduced bank risks are characterized by a smaller asset size and strong depository funding. Overall, the banking system has not finished the post-crisis consolidation. These results provide new insights into the understanding of bank risks and serve as an underpinning for recent regulatory efforts aimed at strengthening banks (joint) risk management of liquidity, credit, and market risks. In the second paper, titled ”Network Topology and Systemic Risk Contribution: An Empirical Evaluation”, I ask how the network topology of financial institutions affects their systemic risk contribution. I deploy DCC-GARCH model to construct network topology and SRISK and LRMES to measure systemic risk contributions. I classify financial firms into receivers, drivers, and key players. Moreover, I analyze network impact on systemic risk contribution based on their industry groups: Depositories, Insurance, Broker-Dealers, and Others. In the final paper, titled ”Identifying Second Round Effects: Food and Energy Prices and Core Inflation Dynamics” joint with Weicheng Lian, we seek to explore the factors behind low inflation rates during 2014. We consider the role of unprocessed food and energy prices on core inflation using a panel Vector Autoregressive Regression estimated among 29 European economies between 1999 and 2014, we find evidence consistent with second-round effects: (i) unprocessed food and energy price shocks both have weaker and less persistent impact on core inflation in countries with more anchored inflation expectation, (ii) after we shut down changes in inflation expectations, both unprocessed food, and energy price shocks have weaker and less persistent impact on core inflation, and in this case, result (i) disappears, i.e., the impacts become almost the same between countries with more anchored and those with less anchored inflation expectations. Keywords: Economics, Finance, Banking risk, Credit risk, Inflation, Liquidity risk, Networks, Systemic risk, Economics