MONITORING RISK WITH V-LAB Robert Engle Director of Volatility Institute At NYU Stern Dalton Investments, March 2014

V-LAB The Volatility Laboratory or V-LAB is a public website with a wide range of risk measures that are updated daily. The site is a laboratory to determine the accuracy and reliability of cutting edge statistical models of financial risk. The site is designed to bring new academic developments to practitioners and regulators in a timely way. The Volatility Institute is supported by generous funding from the Sloan Foundation, Banque de France, Armellino Foundation, Deutsche Bank, BlackRock, and our collaborators UNSW and Universite de Lausanne

VLAB.STERN.NYU.EDU Or Google vlab There are four main regions on V-LAB Volatility Correlation Systemic Risk Long Run Risk Lets take a look at each before turning to systemic risk.

WELCOME PAGE

SECTORAL CHANGES IN VOL

S&P VOLS

MORE INFORMATION

COMPARISON OF ASSET CLASSES

RUSSIAN ASSETS

MICEX, MOSCOW

OTHER MARKETS

CDS AND EQUITY

COMMODITY CORRELATIONS

ASSET CLASS CORRELATIONS

LONG RUN RISK VaR is the 1% quantile of returns for some asset one day in the future. It is a very widely used measure of risk but is clearly a short run measure of risk. What is the VaR one month or one year from now? How much can some asset decline in a year? Measuring “the risk that the risk can change” Use GARCH and options to forecast quantiles.

LONG RUN RISK OF SP

Systemic risk

FINANCIAL STABILITY In the global financial crisis of 2007-2009, we learned that failure of the financial system could have massive effects on the real economy, potentially for years to come. The sovereign debt crisis in Europe is a reminder that even though the causes may appear different, financial failure has real effects. How can we forsee and prevent these events?

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SYSTEMIC RISK We saw that the Lehman bankruptcy began the worst episode of the global financial crisis. But it coincided with deep distress at FANNY and FREDDIE, Citi, Bank of America, Merrill Lynch, Goldman Sachs, Morgan Stanley, AIG, WAMU, Wachovia, and many more. Lehman was not a domino – this was a tsunami. Weakness of the financial sector as a whole is the most important determinant of a financial crisis. It is not enough that one bank is undercapitalized.

DEFINITION How much capital would a financial institution need to raise in order to function normally if we have another financial crisis? We measure this econometrically based on market data on equities and balance sheet data on liabilities. We update weekly on V-LAB for US and Global financial firms. We call this SRISK. Principle investigators: Viral Acharya, Matt Richardson and me at the Volatility Institute at NYU’s Stern School. Collaboration with HEC Lausanne and the Institute for Global Finance at University of New South Wales. Contributions by Christian Brownlees, Rob Capellini, Diane Perriet, Emil Siriwardane. References: Acharya, Pedersen, Phillipon, Richardson “Measuring Systemic Risk (2010); Acharya, Engle, Richardson “Capital Shortfall, A New Approach to Ranking and Regulating Systemic Risks, AEAPP (2012), Brownlees and Engle, “Volatilities, Correlations and Tails for Systemic Risk Measurement”,2010

GLOBAL SYSTEMIC RISK

GLOBAL SRISK SINCE 2000 9/22/2018 VOLATILITY INSTITUTE

WHERE IS THE RISK today? 9/22/2018 VOLATILITY INSTITUTE

RELATIVE TO GDP 9/22/2018 VOLATILITY INSTITUTE

US SINCE 2000 9/22/2018 VOLATILITY INSTITUTE

ASIA SINCE 2000 9/22/2018 VOLATILITY INSTITUTE

CHINA and JAPAN 9/22/2018 VOLATILITY INSTITUTE

EUROPE SINCE 2000

RUSSIA TODAY 9/22/2018 VOLATILITY INSTITUTE

US FIRMS TODAY 9/22/2018 VOLATILITY INSTITUTE

COMPARISON WITH CCAR Fed released its 2014 CCAR on Thursday Minimum Tier 1 Capital Leverage Ratio is the minimum of book equity over Q4 2013-Q4 2015 under the most severe adverse scenario Compare with SRISK as of Oct 31, 2013 and with the stressed leverage ratio implied by V-LAB. What capital ratio would a firm have after V-LAB stress. Drop non-bank financial firms, firms without publicly traded equity and banks not included by FED to get 21 firms. All rank and cardinal correlations are .6 or .7. 9/22/2018 VOLATILITY INSTITUTE

STRESSED LEVERAGE RATIO AND CCAR LEVERAGE RATIO 9/22/2018 VOLATILITY INSTITUTE

9/22/2018 VOLATILITY INSTITUTE