Measuring systemic risk

Acharya, Viral V.; Pedersen, Lasse H.; Philippon, Thomas; Richardson, Matthew

doi:10.26509/frbc-wp-201002

Working Paper

Measuring systemic risk

Abstract: We present a simple model of systemic risk and show how each financial institution?s contribution to systemic risk can be measured and priced. An institution?s contribution, denoted systemic expected shortfall (SES), is its propensity to be undercapitalized when the system as a whole is undercapitalized, which increases in its leverage, volatility, correlation, and tail-dependence. Institutions internalize their externality if they are ?taxed? based on their SES. Through several examples, we demonstrate empirically the ability of components of SES to predict emerging systemic risk during the nancial crisis of 2007-2009.

Keywords: Systemic risk; Risk;

https://doi.org/10.26509/frbc-wp-201002