“James Hamilton unearthed a pretty interesting tool from NYU Stern that helps calculate the systemic risk of specific financial institutions. He recently described the process that NYU uses to generate their results:
If you enjoy the content at iBankCoin, please follow us on Twitter“The first step that Engle and colleagues propose is to calculate what they call the Marginal Expected Shortfall (MES) associated with a given financial institution. This is an estimate, based on recent dynamic variances and correlations of observed stock prices, of how much the stock valuation of a given institution would be expected to fall today if the overall market were to decline by more than 2%. This is essentially a time-varying tail-event beta, details of whose estimation can be found here.”
