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Measuring Systemic Risk

Viral Acharya (), Lasse Pedersen, Thomas Philippon () and Matthew P Richardson

No 8824, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: bailout; financial regulation; systemic risk; value at risk (search for similar items in EconPapers)
JEL-codes: G01 G18 (search for similar items in EconPapers)
Date: 2012-02
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fmk and nep-rmg
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Journal Article: Measuring Systemic Risk (2017) Downloads
Working Paper: Measuring systemic risk (2010) Downloads
Working Paper: Measuring systemic risk (2010)
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