Measuring Systemic Risk

Acharya, Viral V.; Pedersen, Lasse Heje; Philippon, Thomas; Richardson, Matthew P.

Download This Paper

Open PDF in Browser

Add Paper to My Library

Measuring Systemic Risk

FRB of Cleveland Working Paper No. 10-02

55 Pages Posted: 24 Apr 2010 Last revised: 28 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; 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

There are 3 versions of this paper

Date Written: April 23, 2010

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.

Keywords: systemic risk, risk pricing, systemic expected shortfall, risk internalization

JEL Classification: G01, G18

Suggested Citation: Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and Pedersen, Lasse Heje and Philippon, Thomas and Richardson, Matthew P., Measuring Systemic Risk (April 23, 2010). FRB of Cleveland Working Paper No. 10-02, Available at SSRN: https://ssrn.com/abstract=1595075