How useful is the Marginal Expected Shortfall for the measurement of systemic exposure? A practical assessment

Julien Idier, Gildas Lame and Jean-Stéphane Mésonnier

Journal of Banking & Finance, 2014, vol. 47, issue C, 134-146

Abstract: We explore the practical relevance from a supervisor’s perspective of a popular market-based indicator of the exposure of a financial institution to systemic risk, the Marginal Expected Shortfall (MES). The MES of an institution can be defined as its expected equity loss when the market itself is in its left tail. We estimate the dynamic MES recently proposed by Brownlees and Engle (2012) for a panel of 68 large US banks over the last decade and a half. Running panel regressions of the MES on bank characteristics, we first find that the MES can be roughly rationalized in terms of standard balance-sheet indicators of bank financial soundness and systemic importance. We then ask whether the cross section of the MES can help to identify ex ante, i.e. before a crisis unfolds, which institutions are more likely to suffer the most severe losses ex post, i.e. once it has unfolded. Unfortunately, using the 2007–2009 crisis as a natural experiment, we find that some standard balance-sheet ratios are better able than the MES to predict large equity losses conditionally to a true crisis.

Keywords: MES; Systemic risk; Tail correlation; Balance sheet ratios; Panel (search for similar items in EconPapers)
JEL-codes: C5 E44 G2 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (38)

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Related works:
Working Paper: How useful is the marginal expected shortfall for the measurement of systemic exposure? A practical assessment (2013)
Working Paper: How useful is the Marginal Expected Shortfall for the measurement of systemic exposure? A practical assessment (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:47:y:2014:i:c:p:134-146

DOI: 10.1016/j.jbankfin.2014.06.022

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