Net Systemic Risk

Abstract

The emphasis of this paper is on understanding the proliferation of financial institutions beyond movements of the entire market, namely, systemic risk net of systematic risk. I present economic foundation for this new notion of risk I term “net systemic risk” and propose two metrics: Net Systemic Risk (NSR) and Reverse Net Systemic Risk (RevNSR). I also provide a theoretical link between net systemic risk and other risk classes including total, systemic, systematic, and idiosyncratic risk. The empirical analysis for NSR and RevNSR demonstrates that these measures would be able to predict systemic pressure during the financial crisis of 2007-2009.