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Working Paper

Measuring Systemic Risk

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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 financial crisis of 2007-2009.
03.18.2010ISSN 2573-7953 WP 10-02DOI 10.26509/frbc-wp-201002
Keywords systemic risk, risk pricing, systemic expected shortfall, risk internalization
JEL Classification Codes G01, G18

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Acharya, Viral V., Lasse Pedersen, Thomas Philippon, and Matthew Richardson. 2010. “Measuring Systemic Risk.” Federal Reserve Bank of Cleveland, Working Paper No. 10-02. https://doi.org/10.26509/frbc-wp-201002