Measuring Systemic Risk

Viral V. Acharya, Lasse Heje Pedersen, Thomas Philippon, Matthew P. Richardson

Publikation: Working paperForskning

Abstrakt

We present a simple model of systemic risk and we show that each financial institution's contribution to systemic risk can be measured as its systemic expected shortfall (SES), i.e., its propensity to be undercapitalized when the system as a whole is undercapitalized. SES increases with the institution's leverage and with its expected loss in the tail of the system's loss distribution. Institutions internalize their externality if they are ‘taxed’ based on their SES. We demonstrate empirically the ability of SES to predict emerging risks during the financial crisis of 2007-2009, in particular, (i) the outcome of stress tests performed by regulators; (ii) the decline in equity valuations of large financial firms in the crisis; and, (iii) the widening of their credit default swap spreads.
OriginalsprogEngelsk
UdgivelsesstedLondon
UdgiverCentre for Economic Policy Research
Antal sider33
StatusUdgivet - feb. 2012
NavnCentre for Economic Policy Research. Discussion Papers
Nummer8824
ISSN0265-8003

Emneord

  • Systemic risk
  • Bailout
  • Financial regulation
  • Value at risk

Citationsformater