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Pitfalls in the Use of Systemic Risk Measures

56 Pages Posted: 12 Apr 2015 Last revised: 2 Apr 2017

Gunter Löffler

Ulm University

Peter Raupach

Deutsche Bundesbank - Research Department

Date Written: August 2, 2016

Abstract

We examine pitfalls in the use of return-based measures of systemic risk contributions (SRCs). For both linear and non-linear return frameworks, assuming normal and heavy-tailed distributions, we identify non-exotic cases in which a change in a bank's systematic risk, idiosyncratic risk, size or contagiousness increases the risk of the system but lowers the measured SRC of the bank. Assessments based on estimated SRCs could thus produce false interpretations and incentives. We also identify potentially adverse side effects: A change in a bank's risk structure can make the measured SRC of its competitors increase more strongly than its own one.

Keywords: Systemic Risk; CoVaR; Marginal Expected Shortfall; Tail Risk

JEL Classification: G21, G28

Suggested Citation

Löffler, Gunter and Raupach, Peter, Pitfalls in the Use of Systemic Risk Measures (August 2, 2016). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2593257 or http://dx.doi.org/10.2139/ssrn.2593257

Gunter Löffler (Contact Author)

Ulm University ( email )

Helmholzstrasse
Ulm, D-89081
Germany
+49 731 50 23598 (Phone)
+49 731 50 23950 (Fax)

Peter Raupach

Deutsche Bundesbank - Research Department ( email )

Wilhelm-Epstein-Str. 14
Frankfurt, 60431
Germany
+49 69 9566 8536 (Phone)

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