Wednesday, September 8, 2010

Tail VaR approach to measuring and managing systemic risk

By Joseph H.T. Kim and Phelim P. Boyle, University of Waterloo

Abstract: This paper proposes a framework for measuring and managing systemic risk. Current approaches to solvency regulation have been criticized for their focus on individual firms rather than the system as a whole. Our procedure shows how an insurance program can be designed to deal with systemic risk through a risk charge on participating institutions. We use the Conditional Tail Expectation (Tail VaR) to compute the risk exposure and the premiums. One of the frequent criticisms of the current regulations is that the capital requirements have a pro-cyclical impact since they require extra capital in periods of extreme stress thus exacerbating a crisis. We show how to implement an insurance program that is counter-cyclical and we illustrate the procedure using a numerical example.

Download here: papers.ssrn.com/sol3/papers.cfm?abstract_id=1666553

No comments: