Measuring Systemic Risk

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

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Abstract

We present an economic model of systemic risk in which undercapitalization of the financial sector as a whole is assumed to harm the real economy, leading to a systemic risk externality. Each financial institution’s contribution to systemic risk can be measured as its systemic expected shortfall (SES), that is, its propensity to be undercapitalized when the system as a whole is undercapitalized. SES increases in the institution’s leverage and its marginal expected shortfall (MES), that is, its losses in the tail of the system’s loss distribution. We demonstrate empirically the ability of components of SES to predict emerging systemic risk during the financial crisis of 2007–2009.
Original languageEnglish
JournalThe Review of Financial Studies
Volume30
Issue number1
Pages (from-to)2-47
Number of pages46
ISSN0893-9454
DOIs
Publication statusPublished - 2017

Cite this

Acharya, V. V., Heje Pedersen, L., Philippon, T., & Richardson, M. (2017). Measuring Systemic Risk. The Review of Financial Studies, 30(1), 2-47. https://doi.org/10.1093/rfs/hhw088