Measuring Systemic Risk

The authors 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, they demonstrate empirically the ability of components of SES to predict emerging systemic risk during the financial crisis of 2007-2009.

Provided by: Federal Reserve Bank of Cleveland Topic: Security Date Added: Mar 2010 Format: PDF

Download Now

Find By Topic