From the CAPM with systemic risk to the identification of systemically important financial institutions.

Summary In this paper, we propose to test an extension of the Capital Asset Pricing Model (CAPM), in which we add a systemic risk factor, measured by an aggregation of the main systemic risk measures, as recently proposed by different authors, in the framework of a parsimonious principal component analysis (PCPA). Our empirical analysis of the U.S. market shows that systemic risk is indeed an important component of compensation on some securities. Finally, we propose an original application for the identification and classification of systemically important financial institutions (SIFIs).