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Pitfalls in the Use of Systemic Risk Measures

  • Gunter Löffler and Peter Raupach
Abstract

We examine pitfalls in the use of return-based measures of systemic risk contributions (SRCs). For both linear and nonlinear return frameworks, assuming normal and heavy-tailed distributions, we identify nonexotic cases in which a change in a bank’s systematic risk, idiosyncratic risk, size, or contagiousness increases the risk of the system but lowers the measured SRC of the bank. Assessments based on estimated SRCs could thus produce false interpretations and incentives. We also identify potentially adverse side effects: A change in a bank’s risk structure can make the measured SRC of its competitors increase more strongly than its own.

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Corresponding author
* Löffler, gunter.loeffler@uni-ulm.de, Ulm University Institute of Finance; Raupach (corresponding author), peter.raupach@bundesbank.de, Deutsche Bundesbank Research Center.
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1

The views expressed in this article represent the authors’ personal opinions and do not necessarily reflect the views of the Deutsche Bundesbank or its staff. We thank Tobias Adrian (the referee), Stephen Brown (the editor), Ben Craig, Thibaut Duprey, Co-Pierre Georg, Natalie Packham, Daniel Rösch, Martin Summer, and participants of the Chair Seminar at the Autorité de Contrôle Prudentiel et de Résolution, France, research seminars at Bundesbank and Brunel University, the 2012 Financial Risks International Forum, the 2013 research workshop of the European Banking Authority, and the 2015 RiskLab/Bank of Finland/European Systemic Risk Board Conference on Systemic Risk Analytics.

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Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
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