Birgit Rudloff (Princeton University)

“Measures of Systemic Risk”

Abstract

Systemic risk refers to the risk that the financial system is susceptible to failures due to the characteristics of the system itself. The tremendous cost of this type of risk requires the design and implementation of tools for the efficient macroprudential regulation of financial institutions. In this talk we will proposes a novel approach to measuring systemic risk.

The suggested systemic risk measures express systemic risk in terms of capital endowments of the financial firms. Acceptability is defined in terms of cash flows to the entire society and specified by a standard acceptance set of a scalar risk measure. Random cash flows can be derived conditional on the capital endowments of the firms within a large class of network models of financial systems. These may include both local and global interaction. The resulting systemic risk measures are set-valued and allow a mathematical analysis on the basis of set-valued convex analysis. At the same time, they can easily be applied to the regulation of financial institutions in practice. 

We explain the conceptual framework and the definition of systemic risk measures, provide algorithms for their computation, and illustrate their application in numerical case studies – e.g. in the network models of Eisenberg & Noe (2001), Cifuentes, Shin & Ferrucci (2005), and Amini, Filipovic & Minca (2013).  This is joint work with Zach Feinstein (Washington University in St. Louis) and Stefan Weber (Leibniz University Hannover).