Financial Network Systemic Risk Contributions
57 Pages Posted: 26 Aug 2013
Date Written: August 25, 2013
We propose the realized systemic risk beta as a measure for financial companies’ contribution to systemic risk given network interdependence between firms’ tail risk exposures. Conditional on statistically pre-identified network spillover effects and market and balance sheet information, we define the realized systemic risk beta as the total time-varying marginal effect of a firm’s Value-at-Risk (VaR) on the system’s VaR. Suitable statistical inference reveals a multitude of relevant risk spillover channels and determines companies’ systemic importance in the U.S. financial system. Our approach can be used to monitor companies’ systemic importance allowing for a transparent macroprudential regulation.
Keywords: systemic risk contribution, systemic risk network, Value at Risk, network topology, two-step quantile regression, time-varying parameters
JEL Classification: G01, G18, G32, G38, C21, C51, C63
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