How useful is the Marginal Expected Shortfall for the measurement of systemic exposure? A practical assessment

Julien Idier, Gildas Lame and Jean-Stéphane Mésonnier

Abstract: We explore the practical relevance from a supervisor's perspective of a popular market-based indicator of the exposure of a financial institution to systemic risk, the marginal expected shortfall (MES). The MES of an institution can be defined as its expected equity loss when the market itself is in its left tail. We estimate the dynamic MES recently proposed by Brownlees and Engle (2011) for a panel of 65 large US banks over the last decade and a half. Running panel regressions of the MES on bank characteristics, we first find that the MES can be roughly rationalized in terms of standard balance sheet indicators of bank financial soundness and systemic importance. We then ask whether the cross section of the MES can help to identify ex ante, i.e. before a crisis unfolds, which institutions are the more likely to suffer the most severe losses ex post, i.e. once it has unfolded. Unfortunately, using the recent crisis as a natural experiment, we find that standard balance-sheet metrics like the tier one solvency ratio are better able than the MES to predict equity losses conditionally to a true crisis.

Keywords: MES; systemic risk; tail correlation; balance sheet ratios; panel. (search for similar items in EconPapers)
JEL-codes: C5 E44 G2 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2011
New Economics Papers: this item is included in nep-ban and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
https://publications.banque-france.fr/sites/defaul ... g-paper_348_2011.pdf (application/pdf)

Related works:
Journal Article: How useful is the Marginal Expected Shortfall for the measurement of systemic exposure? A practical assessment (2014)
Working Paper: How useful is the marginal expected shortfall for the measurement of systemic exposure? A practical assessment (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:348

Access Statistics for this paper

More papers in Working papers from Banque de France Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS. Contact information at EDIRC.
Bibliographic data for series maintained by Michael brassart ().