Systemic Risk Components in a Network Model of Contagion

Abstract

We show how to do systemic risk attribution in a network model of contagion with interlocking balance sheets, using the Shapley and Aumann-Shapley values. As a preliminary, we extend portfolio risk attribution to risk attribution for a single firm with a balance sheet. Along the way, we establish new results on sensitivity analysis of the Eisenberg-Noe network model of contagion, featuring a Markov-chain interpretation. We illustrate the design process for systemic risk attribution methods by developing several of them.

Keywords: systemic risk, risk components, risk attribution, risk allocation, cost allocation, contagion