The information in systemic risk rankings

• Published in: Journal of empirical finance 2016-09, Vol.38, p.461-475
• Main Authors: Nucera, Federico, Schwaab, Bernd, Koopman, Siem Jan, Lucas, André
• Format: Article
• Language: English
• Subjects: Banking supervision; Financial regulation; Forecast combination; Risk rankings; Systemic risk contribution
• ISSN: 0927-5398; 1879-1727
• DOI: 10.1016/j.jempfin.2016.01.002

We propose to pool alternative systemic risk rankings for financial institutions using the method of principal components. The resulting overall ranking is less affected by estimation uncertainty and model risk. We apply our methodology to disentangle the common signal and the idiosyncratic components from a selection of key systemic risk rankings that have been proposed recently. We use a sample of 113 listed financial sector firms in the European Union over the period 2002–2013. The implied ranking from the principal components is less volatile than most individual risk rankings and leads to less turnover among the top ranked institutions. We also find that price-based rankings and fundamentals-based rankings deviated substantially and for a prolonged time in the period leading up to the financial crisis. We test the adequacy of our newly pooled systemic risk ranking by relating it to credit default swap premia. •We pool alternative systemic risk rankings for financial institutions using the method of principal components; the overall ranking is less affected by estimation uncertainty and model risk;•We disentangle the common signal and the idiosyncratic components from a selection of key systemic risk rankings;•We use a sample of 113 listed financial sector firms in the European Union over the period 2002–2013;•Our new ranking is less volatile than most individual risk rankings and leads to less turnover among the top ranked institutions;•The price-based and fundamentals-based rankings deviate substantially and for a prolonged time in the period leading up to the financial crisis;•We test the adequacy of our newly pooled systemic risk ranking by relating it to CDS premia.