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Measuring systemic risk

Author

Listed:
  • Viral V. Acharya
  • Lasse H. Pedersen
  • Thomas Philippon
  • Matthew Richardson

Abstract

We present a simple model of systemic risk and show how each financial institution?s contribution to systemic risk can be measured and priced. An institution?s contribution, denoted systemic expected shortfall (SES), is its propensity to be undercapitalized when the system as a whole is undercapitalized, which increases in its leverage, volatility, correlation, and tail-dependence. Institutions internalize their externality if they are ?taxed? based on their SES. Through several examples, we demonstrate empirically the ability of components of SES to predict emerging systemic risk during the nancial crisis of 2007-2009.

Suggested Citation

  • Viral V. Acharya & Lasse H. Pedersen & Thomas Philippon & Matthew Richardson, 2010. "Measuring systemic risk," Working Papers (Old Series) 1002, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:1002
    DOI: 10.26509/frbc-wp-201002
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    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G01 - Financial Economics - - General - - - Financial Crises

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