TRC Networks and Systemic Risk

Posted: 22 Dec 2015 Last revised: 22 May 2019

See all articles by Andrew W. Lo

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

Roger Stein

Sloan School of Management, MIT

Date Written: March 2, 2016

Abstract

We introduce a new approach for identifying and monitoring systemic risk that combines network analysis and tail risk contribution (TRC). Network analysis provides great flexibility in representing and exploring linkages between institutions, but can be overly general in describing the risk exposures of one entity to another. TRC provides a more focused view of key systemic risks fng with richer financial intuition, but it may miss important linkages between financial institutions. Integrating these two methods can provide information on key relationships between institutions that may become relevant during periods of systemic stress. We demonstrate this approach using exposures of money market funds to major financial institutions during July 2011. The results for our example suggest that TRC networks can highlight both institutions and funds that may become distressed during a financial crisis.

Keywords: Systemic Risk; Network Analysis; Credit Risk

JEL Classification: G12

Suggested Citation

Lo, Andrew W. and Stein, Roger, TRC Networks and Systemic Risk (March 2, 2016). MIT Sloan Research Paper No. 5153-15. Available at SSRN: https://ssrn.com/abstract=2705249 or http://dx.doi.org/10.2139/ssrn.2705249

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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617-253-0920 (Phone)
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HOME PAGE: http://web.mit.edu/alo/www

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

Stata Center
Cambridge, MA 02142
United States

Roger Stein (Contact Author)

Sloan School of Management, MIT ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

HOME PAGE: http://www.rogermstein.com

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