FRM: a Financial Risk Meter based on penalizing tail events occurrence

Lining Yu, Wolfgang Karl Härdle, Lukas Borke & Thijs Benschop
In this paper we propose a new measure for systemic risk: the Financial Risk Meter (FRM). This measure is based on the penalization parameter (Lambda) of a linear quantile lasso regression. The FRM is calculated by taking the average of the penalization parameters over the 100 largest US publicly traded financial institutions. We demonstrate the suitability of this risk measure by comparing the proposed FRM to other measures for systemic risk, such as VIX, SRISK...
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