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Measuring Systemic RiskViral V. AcharyaNew York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance Lasse Heje PedersenNew York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER) Thomas PhilipponNew York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER) Matthew P. RichardsonNew York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER) April 23, 2010 FRB of Cleveland Working Paper No. 10-02 Abstract: We present a simple model of systemic risk and show how each financial institution’s contribution to systemic risk can be measured and priced. An institution’s contribution, denoted systemic expected shortfall (SES), is its propensity to be undercapitalized when the system as a whole is undercapitalized, which increases in its leverage, volatility, correlation, and tail-dependence. Institutions internalize their externality if they are “taxed” based on their SES. Through several examples, we demonstrate empirically the ability of components of SES to predict emerging systemic risk during the financial crisis of 2007-2009.
Number of Pages in PDF File: 55 Keywords: systemic risk, risk pricing, systemic expected shortfall, risk internalization JEL Classification: G01, G18 Accepted Paper SeriesDate posted: April 24, 2010 ; Last revised: August 28, 2010Suggested CitationContact Information
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