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Systemic Risks

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The subprime crisis of 2007 brought the worldwide financial system to the brink of breakdown. Famous rating agencies that should have sent early warning signals failed to do so and therefore proved to be poor monitors of financial markets risks.

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Because of the economic hardship a breakdown of financial markets represents, it is of highest importance that objective measures of risk are constructed and made available to the public at large as to avoid future market breakdowns.

The objective of this project is to present the results of a model developed jointly by <a href="https://www.hec.unil.ch/" target="_blank" rel="noreferrer noopener">HEC Lausanne</a> and the <a href="http://www.stern.nyu.edu/experience-stern/about/departments-centers-initiatives/centers-of-research/volatility-institute/index.htm" target="_blank" rel="noreferrer noopener">NYU Stern Volatility Institute</a>. The NYU Stern Volatility Lab, created by NYU Stern Professor and Nobel Laureate <a href="http://www.stern.nyu.edu/rengle/" target="_blank" rel="noreferrer noopener">Robert Engle</a>, provides systemic risk measures for U.S. and global financial firms. A new European model has been built by Profs Robert Engle, <a href="https://people.unil.ch/ericjondeau/" target="_blank" rel="noreferrer noopener">Eric Jondeau</a>, and <a href="http://www.hec.unil.ch/mrockinger/" target="_blank" rel="noreferrer noopener">Michael Rockinger</a> both from HEC Lausanne.

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European measures

systemic risks

Systemic risk measures for European financial institutions are constructed by the Center for Risk Management Lausanne. They are based on the methodology developed by Engle, Jondeau, and Rockinger (2015). 

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SRISK measures the capital shortfall of a firm in case of a new financial crisis, defined as a 40% semi-annual decline of the world financial market. Return fo a firm is driven by the domestic, European, and world stock markets. The expected shortfall is directly based on a 40% semiannual decline of the world stock market. It is computed using 50'000 simulations of the complete model over a 6-month period. The measures are all expressed in billion euros. European systemic risk measures hav been developed in collaboration with the <a href="http://www.stern.nyu.edu/experience-stern/about/departments-centers-initiatives/centers-of-research/volatility-institute/index.htm" target="_blank" rel="noreferrer noopener">NYU Stern’s Volatility Institute</a>, run by NYU Stern Professor and Nobel Laureate Robert Engle. 

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Aggregate SRISK in Europe

Systemic risks

<p>This figure displays the temporal evolution of the aggregate SRISK measure for European financial institutions. Measured in billion euros, it represents the amount of additional capital that would be necessary for all financial institutions in our sample to survive a 40% semi-annual decline of the world financial market. <br></p>