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Econometric Measures of Systemic Risk in the Finance and Insurance Sectors

  • Monica Billio
  • Mila Getmansky
  • Andrew W. Lo
  • Loriana Pelizzon

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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16223.

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Date of creation: Jul 2010
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Publication status: published as Econometric Measures of Systemic Risk in the Finance and Insurance Sectors , Monica Billio, Mila Getmansky, Andrew W. Lo, Loriana Pelizzon. in Market Institutions and Financial Market Risk , Carey, Kashyap, Rajan, and Stulz. 2012
Handle: RePEc:nbr:nberwo:16223
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