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Determinants of Systemic Risk and Information Dissemination

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  • Marcelo Bianconi
  • Xiaxin Hua
  • Chih Ming Tan

Abstract

We study the effects of two measures of information dissemination on the determination of systemic risk. One measure is print-media consumer sentiment based while the other is volatility based. We find evidence that while the volatility measure (VIX) of future expectations has a more significant direct impact upon systemic risk of financial firms under distress, a consumer sentiment measure based on print-media news does impact upon firm's financial stress via the externality of other firm's financial stress. This latter effect is robust even though the VIX and the consumer sentiment have dynamic feedback in the short one and two-day horizon in levels, and contemporaneously in volatility. In reference to the internet bubble of the 1990s, the consumer sentiment measure predicts larger systemic risk in the whole period of exuberance while the VIX predicts a sharp larger systemic risk in the height of the bubble. Our evidence suggests that print-media consumer sentiment might be dominated by the VIX when predicting systemic risk.

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Bibliographic Info

Paper provided by Department of Economics, Tufts University in its series Discussion Papers Series, Department of Economics, Tufts University with number 0776.

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Date of creation: 2013
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Handle: RePEc:tuf:tuftec:0776

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Keywords: conditional value-at-risk; VIX; externality; consumer sentiment;

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