Measuring and Allocating Systemic Risk

22 Pages Posted: 29 Dec 2013 Last revised: 26 Jul 2014

Markus K. Brunnermeier

Princeton University - Department of Economics

Patrick Cheridito

ETH Zurich

Date Written: July 2014

Abstract

This paper develops 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

JEL Classification: G01, G28

Suggested Citation

Brunnermeier, Markus K. and Cheridito, Patrick, Measuring and Allocating Systemic Risk (July 2014). Available at SSRN: https://ssrn.com/abstract=2372472 or http://dx.doi.org/10.2139/ssrn.2372472

Markus Konrad Brunnermeier

Princeton University - Department of Economics ( email )

Bendheim Center for Finance
Princeton, NJ
United States
609-258-4050 (Phone)
609-258-0771 (Fax)

HOME PAGE: http://www.princeton.edu/¡­markus

Patrick Cheridito (Contact Author)

ETH Zurich ( email )

Department of Mathematics
8092 Zurich
Switzerland

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