Measuring Systemic Risk

46 Pages Posted: 22 Mar 2010 Last revised: 9 Aug 2010

See all articles by Viral V. Acharya

Viral V. Acharya

New York University (NYU) - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Lasse Heje Pedersen

AQR Capital Management, LLC; Copenhagen Business School - Department of Finance; New York University (NYU); Centre for Economic Policy Research (CEPR)

Thomas Philippon

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Matthew P. Richardson

Department of Finance, Leonard N. Stern School of Business, New York University

Multiple version iconThere are 3 versions of this paper

Date Written: May 2010

Abstract

We present an economic model of systemic risk and 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 in the institution's leverage and its marginal expected shortfall (MES), i.e., its losses 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 components of SES to predict emerging systemic risk 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: systemic risk, bailout, financial regulation, value at risk

Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and Pedersen, Lasse Heje and Philippon, Thomas and Richardson, Matthew P., Measuring Systemic Risk (May 2010). AFA 2011 Denver Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1573171 or http://dx.doi.org/10.2139/ssrn.1573171

Viral V. Acharya

New York University (NYU) - Leonard N. Stern School of Business ( email )

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HOME PAGE: http://www.stern.nyu.edu/~vacharya

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Lasse Heje Pedersen

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

New York University (NYU) ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Thomas Philippon (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Matthew P. Richardson

Department of Finance, Leonard N. Stern School of Business, New York University ( email )

44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States
+1 (212) 998-0349 (Phone)
212-995-4233 (Fax)

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