Measuring systemic financial risk

"On a recent visit to UCSD, NYU Professor and Nobel Laureate Rob Engle called my attention to the NYU Stern Volatility Laboratory, a great resource that anyone can use to get some very interesting real-time analysis. Here I'd like to describe some of the features available for assessing the systemic risk posed by financial institutions.

The first step that Engle and colleagues propose is to calculate what they call the Marginal Expected Shortfall (MES) associated with a given financial institution. This is an estimate, based on recent dynamic variances and correlations of observed stock prices, of how much the stock valuation of a given institution would be expected to fall today if the overall market were to decline by more than 2%. This is essentially a time-varying tail-event beta, details of whose estimation can be found here.
They next used a dynamic simulation to extrapolate from the MES an estimate of how much the stock would fall in the event of a full financial crisis, defined as a 40% decline in a broad market stock index over a space of 6 months. They estimate this number to be around 18 times the daily MES..."

at http://www.econbrowser.com/archives/2011/05/measuring_syste.html