The information in systemic risk rankings

Abstract

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Network, market, and book-based systemic risk rankings

“…This reduces a large number of familiar risk ranking methods to a much smaller number, namely the firm's beta and its VaR. These findings are confirmed by the empirical analysis in Nucera et al (2015), who find that a combination of a book based ranking and a market-value based ranking reflects most of the cross-sectional and time-series variation in available systemic risk rankings. In the remainder of this paper, we therefore restrict our attention to a beta and a VaR related ranking methodology as alternatives to the network based rankings described earlier.…”

“…Second, we compare different systemic risk rankings using a principal components analysis, similar to the analyses in Billio et al (2012), Moreno and Pena (2013), Giglio et al (2015), and Nucera et al (2015). In contrast to previous work, we focus on the value-added of the network based measures compared to the most popular non-network based alternatives.…”

“…Based on their arguments, Benoit et al also show empirically that for instance beta and MES reveal nearly equivalent dynamic patterns of systemic risk, as predicted by their theoretical analysis. Also Nucera et al (2015) find that only two components (one book-based and one market-based) out of a range of available systemic risk ranking methodologies suffice to summarize most of the cross-sectional and time series variation in these rankings.…”

“…The beta is computed by regressing stock market returns on the S&P Europe 350 index. Following Nucera et al (2015), we weight the beta by the market value of the firm to obtain a measure of systematic capital at risk. The betas are estimated using a rolling window of the previous 200 trading days.…”

“…The methods comprise both the market and book based methodologies which were classified as most important by Benoit et al (2015) and Nucera et al (2015). At the same time, the network based method of Dungey et al (2013) is included, which allows us to investigate the value-added of network based ranking methodologies.…”