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Systemic Risk, Pension Funds, Insurers, Asset Managers [26]

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Bullet points include: Concept of tranching and a capital waterfall can be applied to financial systems as well as individual firms (but also to CDOs etc.). Implied correlation can go very high in very stressed circumstances. Common firm-level systemic risk measures, such as conditional value at risk (CoVaR) and Marginal and Systemic Expected Shortfall (SES), in effect represent marginal contribution to value of the lowest tranche. Contributions to systemic risk can be significant even if no direct interconnectivity. Quantification of risk (unlike understanding of risk) is largely agnostic to the source of an unwanted correlation: Could merely reflect common investment holdings or exposures. Or even just market worries about possible commonalities, c.f. MMF ‘runs’ during financial crisis, Roosevelt’s “the only thing we have to fear is fear itself”

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