Systemic Risk and Sentiment Chapter Contribution to Handbook on Systemic Risk
AbstractRegulators charged with monitoring systemic risk need to focus on sentiment as well as narrowly defined measures of systemic risk. This chapter describes techniques for jointly monitoring the co-evolution of sentiment and systemic risk. To measure systemic risk, we use Marginal Expected Shortfall. To measure sentiment, we apply a behavioral extension of traditional pricing kernel theory, which we supplement with external proxies. We illustrate the technique by analyzing the dynamics of sentiment before, during, and after the global financial crisis which erupted in September 2008. Using stock and options data for the S&P 500 during the period 2002–2009, our analysis documents the statistical relationship between sentiment and systemic risk.
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Bibliographic InfoPaper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 11-49.
Length: 32 pages
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ystemic risk; Marginal Expected Shortfall; Pricing Kernel; Overconfidence; Optimism;
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