56 Pages Posted: 12 Apr 2015 Last revised: 2 Apr 2017
Date Written: August 2, 2016
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: 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
By Andrew Ang