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Activity Number: 173
Type: Topic Contributed
Date/Time: Monday, August 10, 2015 : 10:30 AM to 12:20 PM
Sponsor: Section on Risk Analysis
Abstract #316043
Title: Systemic Risk and the Underlying Statistical Assumptions of SRISK
Author(s): Andrew Wilcox* and Peter Bloomfield
Companies: North Carolina State University and North Carolina State University
Keywords: Systemic Risk ; SRISK ; DCC-GARCH ; SIFIs ; Financial Crisis

In the wake of the Financial Crisis of 2007-2009 government and academic researchers have focused on defining and measuring systemic risk. This research has the potential create more effective regulation regarding Systematically Important Financial Institutions (SIFIs). A leading measure of systemic risk is the SRISK index introduced by Brownlees and Engle (2011). SRISK uses a Long Run Marginal Expected Shortfall (LRMES) calculation to estimate the capital shortage a firm would be faced with conditional on a substantial market decline. In this work we show that the use of of a non-Gaussian working likelihood in their estimation procedure can produce significant changes in LRMES. Specifically longer tailed distributions have the largest effect with differences as large as 20% for certain firms and dates. Additionally we provide a bootstrapping procedure that allows us to quantify the full amount of error in estimating LRMES. These findings allow for a better understanding of SRISK and can help guide decisions regarding its use in a regulatory framework.

Authors who are presenting talks have a * after their name.

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