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Systemic Risk and Sentiment Chapter Contribution to Handbook on Systemic Risk

Listed author(s):
  • Giovanni BARONE-ADESI

    (Swiss Finance Institute and University of Lugano)

  • Loriano MANCINI

    (Swiss Finance Institute and EPFL)

  • Hersh SHEFRIN

    (Leavey School of Business Santa Clara University)

Registered author(s):

    Regulators 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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    Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 11-49.

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    Length: 32 pages
    Date of creation:
    Handle: RePEc:chf:rpseri:rp1150
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