Federal Reserve Bank of New York
Markus K. Brunnermeier
Princeton University - Department of Economics
August 27, 2009
FRB of New York Staff Report No. 348
We propose a measure for systemic risk: CoVaR, the value at risk (VaR) of financial institutions conditional on other institutions being in distress. We define an institution’s (marginal) contribution to systemic risk as the difference between CoVaR and the financial system’s VaR. From our estimates of CoVaR for characteristic-sorted portfolios of publicly traded financial institutions, we quantify the extent to which characteristics such as leverage, size, and maturity mismatch predict systemic risk contribution. We argue for macro-prudential regulation based on the degree to which such characteristics forecast systemic risk contribution.
Number of Pages in PDF File: 42
Keywords: value at risk, systemic risk, adverse feedback loop, endogenous risk, risk
JEL Classification: G10, G18, G20working papers series
Date posted: September 19, 2008 ; Last revised: November 9, 2010
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