Measurement of Systemic Risk – a Critical Review of Selected Models (original) (raw)
Financial instability can lead to financial crises due to its spillover effects to other parts of the economy. Having an accurate measure of systemic risk gives academicians and policy makers the ability to make proper policies in order to predict systemic risks in advance and prevent a financial crisis as soon as warning signals indicate a possible economic disaster. For the purpose of this study the works of past researchers have been analyzed to study the effectiveness of various measures of systemic risk based on market data. Several experts have undergone systematic studies related to this area and have quantified the aggregate level of systemic risk in the economy. The results show that each measure predicts the systemic risk significantly. However each measure suffers its own set of limitations. SRISK, MES and CCA are more accurate in comparison to CoVaR, Granger Causality for identifying systemically important financial institutions.
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