Net Systemic Risk
36 Pages Posted: 31 Jul 2020
Date Written: July 22, 2020
The emphasis of this paper is on understanding the proliferation of financial institutions beyond movements of the entire market, namely, systemic risk net of systematic risk. I present economic foundation for this new notion of risk I term “net systemic risk” and propose two metrics: Net Systemic Risk (NSR) and Reverse Net Systemic Risk (RevNSR). I also provide a theoretical link between net systemic risk and other risk classes including total, systemic, systematic, and idiosyncratic risk. The empirical analysis for NSR and RevNSR demonstrates that these measures would be able to predict systemic pressure during the financial crisis of 2007-2009.
Keywords: net systemic risk, systemic risk, systematic risk, factor structure, marginal utility
JEL Classification: G01
Suggested Citation: Suggested Citation