Assessment of systemic risk measures

Abstract

Systemic risk in the financial system presents a daunting challenge for the regulators of the industry worldwide. The behavior of financial institutions may create risks for the functioning of the whole economy, and in spite of theoretical understanding of these risks, their measurement and regulation still faces considerable challenges.

This thesis studies the empirical assessment of systemic risk measures. A wealth of literature on the theory and measurement of systemic risk exists, yet there is little work on the assessment of the proposed measures. The assessment is challenging because of a gap between proposed measures and economic theory, diversity of these measures, as well as econometric issues and lack of data.

I review existing literature on systemic risk in order to better understand these challenges. I also present an empirical evaluation of one particular method of estimating systemic risk with the SRISK measure, and point out its shortcomings. My main finding is that while the SRISK measure may be useful for the measurement of systemic risk, its usefulness is limited by the sensitivity to underlying modeling choices, and a more thorough empirical understanding of SRISK is necessary before it can be considered as a tool for systemic risk regulation.