RiskRank: Measuring interconnected risk

TL;DR

RiskRank introduces a comprehensive systemic risk measure that combines individual risk levels and their interconnectedness, using a novel aggregation method inspired by the Choquet integral, demonstrated through a European case study.

Contribution

It develops a new systemic risk measure, RiskRank, that jointly assesses risk levels and interconnectedness, enhancing risk measurement accuracy.

Findings

Performs well in out-of-sample analysis

Effective in estimating country-level systemic risk

Captures interrelations among risk factors

Abstract

This paper proposes RiskRank as a joint measure of cyclical and cross-sectional systemic risk. RiskRank is a general-purpose aggregation operator that concurrently accounts for risk levels for individual entities and their interconnectedness. The measure relies on the decomposition of systemic risk into sub-components that are in turn assessed using a set of risk measures and their relationships. For this purpose, motivated by the development of the Choquet integral, we employ the RiskRank function to aggregate risk measures, allowing for the integration of the interrelation of different factors in the aggregation process. The use of RiskRank is illustrated through a real-world case in a European setting, in which we show that it performs well in out-of-sample analysis. In the example, we provide an estimation of systemic risk from country-level risk and cross-border linkages.