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Treasury Notes

 Launching the OFR Working Paper Series with A Survey of Systemic Risk Analytics

By: Jonathan Sokobin
1/11/2012

The Dodd-Frank Act created the Office of Financial Research (OFR) because policymakers and the public need better data and analysis to help them assess and respond to threats to financial stability. With that goal in mind, the OFR is launching a Working Paper Series that will make available the OFR’s work on the analytics and measurement of such threats in depth. Today, we release our first Working Paper -- A Survey of Systemic Risk Analytics, by Dimitrios Bisias (MIT), Mark Flood (OFR), Andrew W. Lo (MIT), and Stavros Valavanis (MIT).

These papers, which will involve collaboration with OFR staff and experts nationwide, are works in progress published in order to elicit discussion among researchers and other interested parties. We hope these papers will spark a lively discussion to help refine our thinking. Based on that feedback, we will revise and update our research to constantly reflect the input and analysis of all stakeholders.

The first paper is focused on quantitative tools to assess threats to financial stability, which makes it an ideal piece with which to launch the OFR Working Paper Series. This survey provides a broad overview of the state of the art in measuring systemic risk by focusing on a key set of 31 specific measurements outlined elsewhere in peer-reviewed articles or working papers. While this is only a small subset of the hundreds of papers that have been written about threats to financial stability, the 31 methodologies cover a wide variety of approaches available in the literature.

The paper also offers tools to assist other researchers. For example, it presents a taxonomy to classify methodologies from four different perspectives, which is essential to help these analyses conducted by academics to be useful to a broader community of market participants. The paper looks at the indicators through four lenses:

  • Data Requirements
  • Supervision
  • Event/Decision Time Horizon
  • Research

Classifying indicators in this way should help to organize and understand the relationships among the rapidly growing list of potential metrics.

In coming weeks, we will make available to researchers a preliminary set of computer codes to calculate the various measures the paper considers. Like the metrics themselves, these source codes are not yet fully tested and documented, but we hope they will be the nucleus of a growing public library of algorithms relevant to assessing threats to financial stability. We will post clarifications, extensions, and fixes to these algorithms as they become available through our collaborative process with experts.

This paper is the first of many that will present the OFR’s in-depth efforts to analyze and measure threats to financial stability. Indeed, the next step will be to evaluate these measures from the perspective of their use to policymakers.

The OFR Working Paper Series can be found on the OFR webpage, where we will post Working Paper #0001, A Survey of Systemic Risk Analytics, and many more to follow.

Jonathan Sokobin is Chief of Analytical Strategy for the OFR.

Posted in:  Wall Street Reform, Office of FInancial Research
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