TRC Networks and Systemic Risk

Abstract

We introduce a new approach for identifying and monitoring systemic risk that combines network analysis and tail risk contribution (TRC). Network analysis provides great flexibility in representing and exploring linkages between institutions, but can be overly general in describing the risk exposures of one entity to another. TRC provides a more focused view of key systemic risks fng with richer financial intuition, but it may miss important linkages between financial institutions. Integrating these two methods can provide information on key relationships between institutions that may become relevant during periods of systemic stress. We demonstrate this approach using exposures of money market funds to major financial institutions during July 2011. The results for our example suggest that TRC networks can highlight both institutions and funds that may become distressed during a financial crisis.