Measuring and Allocating Systemic Risk

Markus Brunnermeier and Patrick Cheridito
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Patrick Cheridito: Department of Mathematics and RiskLab, ETH Zurich, 8092 Zurich, Switzerland

Risks, 2019, vol. 7, issue 2, 1-19

Abstract: In this paper, we develop a framework for measuring, allocating and managing systemic risk. SystRisk, our measure of total systemic risk, captures the a priori cost to society for providing tail-risk insurance to the financial system. Our allocation principle distributes the total systemic risk among individual institutions according to their size-shifted marginal contributions. To describe economic shocks and systemic feedback effects, we propose a reduced form stochastic model that can be calibrated to historical data. We also discuss systemic risk limits, systemic risk charges and a cap and trade system for systemic risk.

Keywords: systemic risk measure; systemic risk allocation; feedback effects; shadow prices; systemic risk limits; systemic risk charges; cap and trade (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

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Persistent link: https://EconPapers.repec.org/RePEc:gam:jrisks:v:7:y:2019:i:2:p:46-:d:226193

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