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Robustness and informativeness of systemic risk measures

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  • Löffler, Gunter
  • Raupach, Peter
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    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. --

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    Bibliographic Info

    Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Papers with number 04/2013.

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    Date of creation: 2013
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    Handle: RePEc:zbw:bubdps:042013

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    Related research

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

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    1. Germán López-Espinosa & Antonio Moreno & Antonio Rubia & Laura Valderrama, 2012. "Short-term Wholesale Funding and Systemic Risk: A Global CoVaR Approach," Faculty Working Papers 02/12, School of Economics and Business Administration, University of Navarra.
    2. Marcello Pericoli & Massimo Sbracia, 2001. "A Primer on Financial Contagion," Temi di discussione (Economic working papers) 407, Bank of Italy, Economic Research and International Relations Area.
    3. Monica Billio & Mila Getmansky & Andrew W. Lo & Loriana Pelizzon, 2010. "Econometric Measures of Systemic Risk in the Finance and Insurance Sectors," NBER Working Papers 16223, National Bureau of Economic Research, Inc.
    4. Memmel, Christoph & Sachs, Angelika, 2013. "Contagion in the interbank market and its determinants," Journal of Financial Stability, Elsevier, vol. 9(1), pages 46-54.
    5. Sylvain Benoit & Gilbert Colletaz & Christophe Hurlin & Christophe Pérignon, 2013. "A Theoretical and Empirical Comparison of Systemic Risk Measures," Working Papers halshs-00746272, HAL.
    6. Céline Gauthier & Toni Gravelle & Xuezhi Liu & Moez Souissi, 2011. "What Matters in Determining Capital Surcharges for Systemically Important Financial Institutions?," Discussion Papers 11-9, Bank of Canada.
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