Fed paper presents method to better estimate systemic risk
Authors find their approach outperforms several commonly used systemic risk indicators
A recent Federal Reserve working paper outlines a new method that could give bank supervisors a more straightforward way of estimating systemic risk.
Using daily interbank lending and stock market returns aggregated each month, the method estimates each bank’s asset holdings and derives an index for portfolio concentration – bank-specific risk – and for portfolio similarity – systematic risk.
The approach measures the market’s susceptibility to propagating shocks across asset classes. The
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