Measuring systemic risk: The Indirect Contagion Index

We introduce a novel micro-founded measure of price-mediated contagion: the Indirect Contagion Index (ICI). It is defined as the Perron-eigenvector of the matrix of liquidity-weighted portfolio overlaps and allows to quantify... [ view full abstract ]

We introduce a novel micro-founded measure of price-mediated contagion: the Indirect Contagion Index (ICI). It is defined as the Perron-eigenvector of the matrix of liquidity-weighted portfolio overlaps and allows to quantify the notion of "interconnectedness" and "systemicness" of systemically important financial institutions.

Using the same liquidity-weighted portfolio overlaps, we analyse how close the official stress scenario of the 2016 European Banking Authority (EBA) was to the worst-case scenario in terms of contagion. Our results suggest that the EBA scenario did not precisely target the vulnerabilities, as implied by the portfolio holdings of European Banks at the time.