financial crisis of 2007-2009financial institution leveragemarginal expected shortfall (MES)systemic expected shortfall (SES)systemic risk
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Abstract (AI)
We present an economic model of systemic risk in which undercapitalization of the financial sector as a whole is assumed to harm the real economy, leading to a systemic risk externality. Each financial institution's contribution to systemic risk can be measured as its systemic expected shortfall (SES), that is, its propensity to be undercapitalized when the system as a whole is undercapitalized. SES increases in the institution's leverage and its marginal expected shortfall (MES), that is, its losses in the tail of the system's loss distribution. We demonstrate empirically the ability of components of SES to predict emerging systemic risk during the financial crisis of 2007-2009.
Key Findings
1
Empirical evidence shows that SES components can predict emerging systemic risk during the 2007–2009 financial crisis.
2
It introduces systemic expected shortfall (SES) to measure an institution’s propensity to be undercapitalized when the financial system is undercapitalized.
3
SES increases with both institutional leverage and marginal expected shortfall (MES), measuring losses in the tail of the system-wide loss distribution.
4
The paper develops an economic model where undercapitalization of the financial sector harms the real economy, creating a systemic risk externality.
Research Object
Financial institutions and the financial system as a whole during the 2007–2009 financial crisis
Research Subject
Systemic risk contributions measured by systemic expected shortfall (SES), including the effects of leverage and marginal expected shortfall (MES), and their ability to predict emerging systemic risk
Publication Details
Publication Date
2016-10-11
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