NYU STERN SYSTEMIC RISK RANKINGS
The RISK page of the Volatility Laboratory presents a variety of risk measures for major financial firms, both Globally and in the United States. These measures are updated weekly and reveal several dimensions of risk. Historical estimates of each of these risk measures can be plotted to see the changing performance of individual firms.
A financial firm will be unable to function when the value of its equity falls to a sufficiently small fraction of its outstanding liabilities. In good times, such a firm will likely be acquired, may be able to raise new capital or may face an orderly bankruptcy. In bad times, the firm will be unlikely to be able to raise capital, leaving the government with the question of whether to rescue the firm with taxpayer money. In the theoretical analysis of Acharya, Pederson, Phillipon and Richardson (2010), such a capital shortage is damaging to the real economy as the failure of this firm will have repercussions throughout the financial and real sectors. Consequently a firm is systemically risky if it is likely to face a capital shortage just when the financial sector itself is weak.
The analyses presented on this web site seek to measure these concepts for Global and US financial firms. The program calculates the expected capital shortfall faced by a firm in a potential future financial crisis. Conceptually this calculation is like the stress tests that are regularly applied to financial firms; however, here it is done with only publicly available information and is quick and inexpensive to compute. There are two methods used to compute the Long-Run Marginal Expected Shortfall (LRMES) of a firm -- one method which uses simulation and another that does not.
Systemic Risk Analysis with Simulation
This calculation takes three steps. First it estimates on a daily basis, the relation between equity returns on a particular firm and the broad market. These are estimated using asymmetric volatility, correlation and copula methods similar to those in other sections of V-Lab. Then it simulates this process in order to calculate the drop in equity value of this firm that would be expected if the aggregate market falls more than 40% in a six-month window. This is called Long Run Marginal Expected Shortfall or LRMES. Finally, equity losses expected in a crisis are combined with current market value of equity and book value of debt to determine how much capital would be needed in a crisis in order to maintain an 8% capital ratio to asset value.
Systemic Risk Analysis without Simulation
In the analysis without simulation, first estimates of the daily drop in equity value of this firm that would be expected if the aggregate market falls more than 2%. This is called Marginal Expected Shortfall or MES. The measure incorporates the volatility of the firm and its correlation with the market, as well as its performance in extremes. Like the analysis with simulation, these are estimated using asymmetric volatility, correlation and copula methods similar to those in other sections of V-Lab. In a second step this is extrapolated to a financial crisis which involves a much greater fall over a much greater time period. Finally, equity losses expected in a crisis are combined with current equity market value and outstanding measures of debt to determine how much capital would be needed in such a crisis. A firm is assumed to require at least 8% capital relative to its asset value.
Systemic Risk (SRISK)
SRISK is the expected capital shortfall of this firm if there is another crisis. The NYU Stern Systemic Risk Ranking, SRISK%, is the firm’s percentage of financial sector capital shortfall. Firms with a high percentage of capital shortfall in a crisis are not only the biggest losers in a crisis but also are the biggest contributors to the crisis.
To sort the firms by any of these categories, simply click on the heading. To plot any of the series, click on the firm name and select the series to be plotted. You can select the time horizon of the plot. To see help, click on the "?s" in the page.
Related Documents
- Prof. Rob Engle Discusses Risk with Tom Keene and Ken Pruitt of Bloomberg Surveillance
- Prof. Roy Smith Discusses Systemic Risk Rankings
- Prof. Rob Engle Discusses Global Systemic Risk Rankings on CNBC
- Prof. Viral Acharya's Slides from the NY Fed's Conference on Global Systemic Risk
- Measuring Systemic Risk
Acharya, Pedersen, Philippon and Richardson (2010) - A Tax on Systemic Risk
Acharya, Pedersen, Philippon and Richardson (2010) - Volatility, Correlation and Tails for Systemic Risk Measurement
Brownlees and Engle (2010)
US Financials Systemic Risk Top Ten
|
||||||||||||||||||||||||||||||||||||||||||||
|
Global Financials: US Financials: |