Measuring Systemic Risk in the Finance and Insurance Sectors
A significant contributing factor to the Financial Crisis of 2007–2009 was the apparent interconnectedness among hedge funds, banks, brokers, and insurance companies, which amplified shocks into systemic events. In this paper, we propose five measures of systemic risk based on statistical relatio...
| Main Authors: | , , , |
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| Format: | Working Paper |
| Language: | en_US |
| Published: |
Cambridge, MA; Alfred P. Sloan School of Management, Massachusetts Institute of Technology
2011
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| Subjects: | |
| Online Access: | http://hdl.handle.net/1721.1/66679 |
| _version_ | 1811072293567201280 |
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| author | Billio, Monica Getmansky, Mila Lo, Andrew W. Pelizzon, Loriana |
| author_facet | Billio, Monica Getmansky, Mila Lo, Andrew W. Pelizzon, Loriana |
| author_sort | Billio, Monica |
| collection | MIT |
| description | A significant contributing factor to the Financial Crisis of 2007–2009 was the apparent interconnectedness
among hedge funds, banks, brokers, and insurance companies, which amplified
shocks into systemic events. In this paper, we propose five measures of systemic risk based
on statistical relations among the market returns of these four types of financial institutions.
Using correlations, cross-autocorrelations, principal components analysis, regime-switching
models, and Granger causality tests, we find that all four sectors have become highly interrelated
and less liquid 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. Our results suggest that while hedge funds can provide early indications of
market dislocation, their contributions to systemic risk may not be as significant as those
of banks, insurance companies, and brokers who take on risks more appropriate for hedge
funds. |
| first_indexed | 2024-09-23T09:03:40Z |
| format | Working Paper |
| id | mit-1721.1/66679 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T09:03:40Z |
| publishDate | 2011 |
| publisher | Cambridge, MA; Alfred P. Sloan School of Management, Massachusetts Institute of Technology |
| record_format | dspace |
| spelling | mit-1721.1/666792019-04-10T12:27:17Z Measuring Systemic Risk in the Finance and Insurance Sectors Billio, Monica Getmansky, Mila Lo, Andrew W. Pelizzon, Loriana Financial Crises Liquidity Financial Institutions Systemic Risk A significant contributing factor to the Financial Crisis of 2007–2009 was the apparent interconnectedness among hedge funds, banks, brokers, and insurance companies, which amplified shocks into systemic events. In this paper, we propose five measures of systemic risk based on statistical relations among the market returns of these four types of financial institutions. Using correlations, cross-autocorrelations, principal components analysis, regime-switching models, and Granger causality tests, we find that all four sectors have become highly interrelated and less liquid 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. Our results suggest that while hedge funds can provide early indications of market dislocation, their contributions to systemic risk may not be as significant as those of banks, insurance companies, and brokers who take on risks more appropriate for hedge funds. 2011-10-28T17:35:30Z 2011-10-28T17:35:30Z 2010-03 Working Paper http://hdl.handle.net/1721.1/66679 en_US MIT Sloan School of Management Working Paper;4774-10 application/pdf Cambridge, MA; Alfred P. Sloan School of Management, Massachusetts Institute of Technology |
| spellingShingle | Financial Crises Liquidity Financial Institutions Systemic Risk Billio, Monica Getmansky, Mila Lo, Andrew W. Pelizzon, Loriana Measuring Systemic Risk in the Finance and Insurance Sectors |
| title | Measuring Systemic Risk in the Finance and Insurance Sectors |
| title_full | Measuring Systemic Risk in the Finance and Insurance Sectors |
| title_fullStr | Measuring Systemic Risk in the Finance and Insurance Sectors |
| title_full_unstemmed | Measuring Systemic Risk in the Finance and Insurance Sectors |
| title_short | Measuring Systemic Risk in the Finance and Insurance Sectors |
| title_sort | measuring systemic risk in the finance and insurance sectors |
| topic | Financial Crises Liquidity Financial Institutions Systemic Risk |
| url | http://hdl.handle.net/1721.1/66679 |
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