Working Paper: NBER ID: w17454
Authors: Tobias Adrian; Markus K. Brunnermeier
Abstract: We propose a measure for systemic risk: CoVaR, the value at risk (VaR) of the financial system conditional on institutions being under distress. We define an institution's contribution to systemic risk as the difference between CoVaR conditional on the institution being under distress and the CoVaR in the median state of the institution. From our estimates of CoVaR for the universe of publicly traded financial institutions, we quantify the extent to which characteristics such as leverage, size, and maturity mismatch predict systemic risk contribution. We also provide out of sample forecasts of a countercyclical, forward looking measure of systemic risk and show that the 2006Q4 value of this measure would have predicted more than half of realized covariances during the financial crisis.
Keywords: systemic risk; covar; value at risk; financial institutions
JEL Codes: G17; G21; G22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher leverage (G32) | higher systemic risk contribution (F65) |
| higher size (C55) | higher systemic risk contribution (F65) |
| higher maturity mismatch (G19) | higher systemic risk contribution (F65) |
| high covar (C10) | higher systemic risk contribution (F65) |
| institutional risk (G21) | higher systemic risk (F65) |