Robustness and Informativeness of Systemic Risk Measures

40 Pages Posted: 21 Jun 2016

See all articles by Gunter Löffler

Gunter Löffler

Ulm University

Peter Raupach

Deutsche Bundesbank - Research Department

Multiple version iconThere are 2 versions of this paper

Date Written: 2013

Abstract

Recent literature has proposed new methods for measuring the systemic risk of financial institutions based on observed stock returns. In this paper we examine the reliability and robustness of such risk measures, focusing on CoVaR, marginal expected shortfall, and option-based tail risk estimates. We show that CoVaR exhibits undesired characteristics in the way it responds to idiosyncratic risk. In the presence of contagion, the risk measures provide conflicting signals on the systemic risk of infectious and infected banks. Finally, we explore how limited data availability typical of practical applications may limit the measures' performance. We generate systemic tail risk through positions in standard index options and describe situations in which systemic risk is misestimated by the three measures. The observations raise doubts about the informativeness of the proposed measures. In particular, a direct application to regulatory capital surcharges for systemic risk could create wrong incentives for banks.

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

JEL Classification: G21, G28

Suggested Citation

Löffler, Gunter and Raupach, Peter, Robustness and Informativeness of Systemic Risk Measures (2013). Bundesbank Discussion Paper No. 04/2013. Available at SSRN: https://ssrn.com/abstract=2796895

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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