Citation

Discussion Paper Details

Please find the details for DP8824 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Measuring Systemic Risk

Author(s): Viral V. Acharya, Lasse Heje Pedersen, Thomas Philippon and Matthew P Richardson

Publication Date: February 2012

Keyword(s): bailout, financial regulation, systemic risk and value at risk

Programme Area(s): Financial Economics and International Macroeconomics

Abstract: 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.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8824

Bibliographic Reference

Acharya, V, Pedersen, L, Philippon, T and Richardson, M. 2012. 'Measuring Systemic Risk'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8824