Systemic risk measures: The simpler the better?

► We compare market-based, high-frequency macro and micro systemic risk measures. ► Macro systemic risk measures gauge tensions in the whole financial sector. ► Micro systemic risk measures focus on individual institutions information. ► We rank the measures within the same group according to three different criteria. ► Measures based on CDS spreads outperform the remainder measures. This paper estimates and compares two groups of high-frequency market-based systemic risk measures using European and US interbank rates, stock prices and credit derivatives data from 2004 to 2009. Measures belonging to the macro group gauge the overall tension in the financial sector and micro group measures rely on individual institution information to extract joint distress. We rank the measures using three criteria: (i) Granger causality tests, (ii) Gonzalo and Granger metric, and (iii) correlation with an index of systemic events and policy actions. We find that the best systemic measure in the macro group is the first principal component of a portfolio of Credit Default Swap (CDS) spreads whereas the best measure in the micro group is the multivariate densities computed from CDS spreads. These results suggest that the measures based on CDSs outperform measures based on interbank rates or stock market prices.