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Systemic risk and the macroeconomy: An empirical evaluation

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  • Giglio, Stefano
  • Kelly, Bryan
  • Pruitt, Seth

Abstract

This article studies how systemic risk and financial market distress affect the distribution of shocks to real economic activity. We analyze how changes in 19 different measures of systemic risk skew the distribution of subsequent shocks to industrial production and other macroeconomic variables in the US and Europe over several decades. We also propose dimension reduction estimators for constructing systemic risk indexes from the cross section of measures and demonstrate their success in predicting future macroeconomic shocks out of sample.

Suggested Citation

  • Giglio, Stefano & Kelly, Bryan & Pruitt, Seth, 2016. "Systemic risk and the macroeconomy: An empirical evaluation," Journal of Financial Economics, Elsevier, vol. 119(3), pages 457-471.
  • Handle: RePEc:eee:jfinec:v:119:y:2016:i:3:p:457-471
    DOI: 10.1016/j.jfineco.2016.01.010
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    More about this item

    Keywords

    Systemic risk; Quantile regression; Dimension reduction; Macroeconomy;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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