Press Releases
NYU Stern Launches NYU Stern Systemic Risk Rankings
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New York University Stern School of Business is launching the NYU Stern Systemic Risk Rankings, a weekly rating and ordering by level of risk that the largest U.S. financial institutions bring to the financial system. The new rankings use stock quotations and other market data, from 1990 to the present, and provide an early warning that will help regulators identify threats to the overall health of the financial system. The rankings are accessible online at www.systemicriskranking.stern.nyu.edu from NYU Stern’s Volatility Lab, under the direction of Nobel Laureate Robert Engle, whose award-winning work on the ARCH model underpins the calculations.
Several indices are presented and combined to predict the expected loss of a firm in a future financial crisis. The Marginal Expected Shortfall (MES) orders firms by the expected loss on equity each would experience if the market falls by at least two percent. Ultimately, the Systemic Risk Contribution Index (SRISK%) ranks firms by the percentage of total system risk each is expected to contribute in a future crisis. The Systemic Risk Rankings take into consideration company size, exposure to loss of market capitalization, and leverage.
Looking backwards, the ranking methodology successfully predicted the firms most involved in the recent financial crisis. It also forecasts accurately the relative losses of more modest downturns.
"Consistent with the vision of NYU Stern’s Volatility Lab, we view our Systemic Risk Rankings as a research laboratory, a first step towards better understanding the systemic risk of financial firms. By making these rankings available over the web, we hope they start a dialog with academics, practitioners and regulators alike, generating new ideas for measuring systemic risk," Professor Engle explained. "Because they use available market data, the ultimate goal of our work is to provide regulators with a new tool to evaluate systemic risk that is more efficient, replicable and transparent than individual scrutiny of confidential company financial and accounting data."
"Measuring and disclosing the risk that institutions contribute to the global financial system will forewarn regulators and limit the damage that a firm can have on the system," said Matthew Richardson, Finance Professor and Director of NYU Stern’s Salomon Center for the Study of Financial Institutions. "In contrast to rating the individual risk of a firm, these new rankings indicate which firms are most risky to the overall U.S. economy at a given time. These are the firms that regulators should be watching closely."
The Systemic Risk Rankings are based on two related NYU Stern faculty research efforts. Professors of Finance Viral Acharya, Lasse Pedersen, Thomas Philippon and Matthew Richardson developed the Marginal Expected Shortfall (MES), the per dollar systemic risk contribution for each institution, in their paper "Measuring Systemic Risk." Their paper provides the theoretical justification for the ranking. Professor Engle and post-doctoral fellow Christian Brownlees’s research is "Volatility, Correlation and Tails for Systemic Risk Measurement." Professor Engle’s econometric model increased the precision of the measure and enabled daily risk computations.
The development of the new rankings grew out of an extensive research effort surrounding the 2008 financial crisis that resulted in the publication of "Restoring Financial Stability: How to Repair a Failed System" (John Wiley & Sons, 2009), co-edited by Professors Acharya and Richardson, who authored the book’s chapter on regulating systemic risk. Professors Engle, Pedersen and Philippon were among the 33 faculty contributors. A second volume, "Regulating Wall Street: The New Architecture of Global Finance," will be published by Wiley in 2010.
New York University Stern School of Business, located in the heart of Greenwich Village, is one of the nation’s premier management education schools and research centers. NYU Stern offers a broad portfolio of academic programs at the graduate and undergraduate levels, all of them informed and enriched by the dynamism, energy and deep resources of the world’s business capital.
Several indices are presented and combined to predict the expected loss of a firm in a future financial crisis. The Marginal Expected Shortfall (MES) orders firms by the expected loss on equity each would experience if the market falls by at least two percent. Ultimately, the Systemic Risk Contribution Index (SRISK%) ranks firms by the percentage of total system risk each is expected to contribute in a future crisis. The Systemic Risk Rankings take into consideration company size, exposure to loss of market capitalization, and leverage.
Looking backwards, the ranking methodology successfully predicted the firms most involved in the recent financial crisis. It also forecasts accurately the relative losses of more modest downturns.
"Consistent with the vision of NYU Stern’s Volatility Lab, we view our Systemic Risk Rankings as a research laboratory, a first step towards better understanding the systemic risk of financial firms. By making these rankings available over the web, we hope they start a dialog with academics, practitioners and regulators alike, generating new ideas for measuring systemic risk," Professor Engle explained. "Because they use available market data, the ultimate goal of our work is to provide regulators with a new tool to evaluate systemic risk that is more efficient, replicable and transparent than individual scrutiny of confidential company financial and accounting data."
"Measuring and disclosing the risk that institutions contribute to the global financial system will forewarn regulators and limit the damage that a firm can have on the system," said Matthew Richardson, Finance Professor and Director of NYU Stern’s Salomon Center for the Study of Financial Institutions. "In contrast to rating the individual risk of a firm, these new rankings indicate which firms are most risky to the overall U.S. economy at a given time. These are the firms that regulators should be watching closely."
The Systemic Risk Rankings are based on two related NYU Stern faculty research efforts. Professors of Finance Viral Acharya, Lasse Pedersen, Thomas Philippon and Matthew Richardson developed the Marginal Expected Shortfall (MES), the per dollar systemic risk contribution for each institution, in their paper "Measuring Systemic Risk." Their paper provides the theoretical justification for the ranking. Professor Engle and post-doctoral fellow Christian Brownlees’s research is "Volatility, Correlation and Tails for Systemic Risk Measurement." Professor Engle’s econometric model increased the precision of the measure and enabled daily risk computations.
The development of the new rankings grew out of an extensive research effort surrounding the 2008 financial crisis that resulted in the publication of "Restoring Financial Stability: How to Repair a Failed System" (John Wiley & Sons, 2009), co-edited by Professors Acharya and Richardson, who authored the book’s chapter on regulating systemic risk. Professors Engle, Pedersen and Philippon were among the 33 faculty contributors. A second volume, "Regulating Wall Street: The New Architecture of Global Finance," will be published by Wiley in 2010.
About New York University Leonard N. Stern School of Business
New York University Stern School of Business, located in the heart of Greenwich Village, is one of the nation’s premier management education schools and research centers. NYU Stern offers a broad portfolio of academic programs at the graduate and undergraduate levels, all of them informed and enriched by the dynamism, energy and deep resources of the world’s business capital.