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Econometric Measures of Systemic Risk in the Finance and Insurance Sectors

In: Market Institutions and Financial Market Risk

Author Info

Listed author(s):
  • Monica Billio
  • Mila Getmansky
  • Andrew W. Lo
  • Loriana Pelizzon

Abstract

We propose several econometric measures of systemic risk to capture the interconnectedness among the monthly returns of hedge funds, banks, brokers, and insurance companies based on principal components analysis and Granger-causality tests. We find that all four sectors have become highly interrelated over the past decade, increasing the level of systemic risk in the finance and insurance industries. These measures can also identify and quantify financial crisis periods, and seem to contain predictive power for the current financial crisis. Our results suggest that hedge funds can provide early indications of market dislocation, and systemic risk arises from a complex and dynamic network of relationships among hedge funds, banks, insurance companies, and brokers.

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This chapter was published in:
  • Mark Carey & Anil Kashyap & Raghuram Rajan & René Stulz, 2012. "Market Institutions and Financial Market Risk," NBER Books, National Bureau of Economic Research, Inc, number care10-1.
    • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 13174.
    Handle: RePEc:nbr:nberch:13174
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    Find related papers by JEL classification:
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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