Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/87503
Authors: 
Dungey, Mardi
Luciani, Matteo
Veredas, David
Year of Publication: 
2012
Series/Report no.: 
Tinbergen Institute Discussion Paper 12-115/IV/DSF44
Abstract: 
We propose a simple network–based methodology for ranking systemically important financial institutions. We view the risks of firms –including both the financial sector and the real economy– as a network with nodes representing the volatility shocks. The metric for the connections of the nodes is the correlation between these shocks. Daily dynamic centrality measures allow us to rank firms in terms of risk connectedness and firm characteristics. We present a general systemic risk index for the financial sector. Results from applying this approach to all firms in the S&P500 for 2003–2011 are twofold. First, Bank of America, JP Morgan and Wells Fargo are consistently in the top 10 throughout the sample. Citigroup and Lehman Brothers also were consistently in the top 10 up to late 2008. At the end of the sample, insurance firms emerge as systemic. Second, the systemic risk in the financial sector built–up from early 2005, peaked in September 2008, and greatly reduced after the introduction of TARP and the rescue of AIG. Anxiety about European debt markets saw the systemic risk begin to rise again from April 2010. We further decompose these results to find that the systemic risk of insurance and deposit–taking institutions differs importantly, the latter experienced a decline from late 2007, inline with the burst of the housing price bubble, while the former continued to climb up to the rescue of AIG.
Subjects: 
Systemic risk
ranking
financial institutions
Lehman
JEL: 
G01
G10
G18
G20
G28
G32
G38
Document Type: 
Working Paper

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