  We propose a dynamic model of dependence structure between financial
institutions within a financial system and we construct measures for dependence
and financial instability. Employing Markov structures of joint credit
migrations, our model allows for contagious simultaneous jumps in credit
ratings and provides flexibility in modeling dependence structures. Another key
aspect is that the proposed measures consider the interdependence and reflect
the changing economic landscape as financial institutions evolve over time. In
the final part, we give several examples, where we study various dependence
structures and investigate their systemic instability measures. In particular,
we show that subject to the same pool of Markov chains, the simulated Markov
structures with distinct dependence structures generate different sequences of
systemic instability.
