Measuring and testing systemic risk from the cross-section of stock returns
Measuring and testing systemic risk from the cross-section of stock returns
This study proposes a novel measure of systemic risk that is obtained by aggregating downside risk information from the cross section of assets. In contrast to existing studies, we expand the analysis of systemic risk to many assets and focus on marginal measures of tail risk that are aggregated using a Fisher-type test to detect the risk of systemic events. The presence of downside risk for each asset of the cross section is examined through a bootstrap test of first-order stochastic dominance between the underlying tail distribution and the tail distribution of the residuals of a multivariate DCC-GARCH model. The application of these methods to the cross section of the FTSE-100 stock returns provides overwhelming evidence on the presence of financial instability during the period 2006–2009. Interestingly, we also find compelling evidence of systemic risk during the 2012–2015 period coinciding with the European debt crisis and after the outbreak of the coronavirus disease 2019 pandemic.
Value-at-Risk, downside risk, model misspecification, sequential limit theory, stochastic dominance test, systemic risk
1503-1531
Jaime, Jesús Gil
942091a3-64e1-4878-827e-1e8463169fa0
Olmo, Jose
706f68c8-f991-4959-8245-6657a591056e
18 April 2024
Jaime, Jesús Gil
942091a3-64e1-4878-827e-1e8463169fa0
Olmo, Jose
706f68c8-f991-4959-8245-6657a591056e
Jaime, Jesús Gil and Olmo, Jose
(2024)
Measuring and testing systemic risk from the cross-section of stock returns.
Journal of Financial Econometrics, 22 (5), , [nbae005].
(doi:10.1093/jjfinec/nbae005).
Abstract
This study proposes a novel measure of systemic risk that is obtained by aggregating downside risk information from the cross section of assets. In contrast to existing studies, we expand the analysis of systemic risk to many assets and focus on marginal measures of tail risk that are aggregated using a Fisher-type test to detect the risk of systemic events. The presence of downside risk for each asset of the cross section is examined through a bootstrap test of first-order stochastic dominance between the underlying tail distribution and the tail distribution of the residuals of a multivariate DCC-GARCH model. The application of these methods to the cross section of the FTSE-100 stock returns provides overwhelming evidence on the presence of financial instability during the period 2006–2009. Interestingly, we also find compelling evidence of systemic risk during the 2012–2015 period coinciding with the European debt crisis and after the outbreak of the coronavirus disease 2019 pandemic.
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Systemic risk - Gil_Olmo
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nbae005
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Accepted/In Press date: 22 March 2024
e-pub ahead of print date: 18 April 2024
Published date: 18 April 2024
Keywords:
Value-at-Risk, downside risk, model misspecification, sequential limit theory, stochastic dominance test, systemic risk
Identifiers
Local EPrints ID: 489743
URI: http://eprints.soton.ac.uk/id/eprint/489743
ISSN: 1479-8409
PURE UUID: ef684c4c-e326-4a5e-86e7-603dc6c1b103
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Date deposited: 01 May 2024 16:57
Last modified: 13 Dec 2024 02:46
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Author:
Jesús Gil Jaime
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