Does Systemic Risk in the Financial Sector Predict Future Economic Downturns? (Allen L., Bali T. G., Tang Y.)

Financial Crises Risk-taking and Risk Management Too-Big-To-Fail

Abstract We derive a measure of aggregate systemic risk using the 1% VaR and Expected Shortfall measures of a cross-section of financial firms, designated CATFIN. In out-of-sample tests, CATFIN forecasts economic downturns almost one year in advance. Even the CATFIN of small banks has predictive power, thereby suggesting that our findings are not the result of too-big-to-fail subsidies. A similarly defined risk measure for non-financial firms has no marginal predictive ability, consistent with bank specialness. The predictive power of CATFIN for future economic downturns remains strong after controlling for leverage, size, past return, bank interconnectedness, and Federal fund rates. CATFIN forecasts future indices of economic conditions (e.g. the Chicago Fed's National Activity Index), as well as individual macroeconomic variables. The CATFIN measure can be used in conjunction with micro-level systemic risk measures (such as CoVaR and MES) to calibrate regulatory limits and risk premiums on individual bank systemic risk taking.
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Libref/ Allen L., Bali T. G., Tang Y. (2010) "Does Systemic Risk in the Financial Sector Predict Future Economic Downturns?", pp. 1 - 61
© Программирование — Александр Красильников, 2008
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