Volatility, Correlation and Tails for Systemic Risk Measurement | Zendy

Christian T. Brownlees | Zendy; Robert F. Engle | Zendy

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Volatility, Correlation and Tails for Systemic Risk Measurement

Author(s) -

Christian T. Brownlees,

Robert F. Engle

Publication year - 2011

Publication title -

ssrn electronic journal

Language(s) - English

Resource type - Journals

ISSN - 1556-5068

DOI - 10.2139/ssrn.1611229

Subject(s) - systemic risk , volatility (finance) , financial crisis , systematic risk , leverage (statistics) , economics , tail risk , financial distress , expected shortfall , financial economics , business , econometrics , actuarial science , financial system , risk management , finance , statistics , mathematics , macroeconomics

We introduce SRISK to measure the systemic risk contribution of a financial firm. SRISK measures the capital shortfall of a firm conditional on a severe market decline, and is a function of its size, leverage and risk. We use the measure to study top financial institutions in the recent financial crisis. SRISK delivers useful rankings of systemic institutions at various stages of the crisis and identifies Fannie Mae, Freddie Mac, Morgan Stanley, Bear Stearns, and Lehman Brothers as top contributors as early as 2005-Q1. Moreover, aggregate SRISK provides early warning signals of distress in indicators of real activity.Received June 7, 2011; accepted April 18, 2016 by Editor Geert Bekaert.

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