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The U. S. government's failure to provide adequate oversight and prudent regulation of the financial markets, together with excessive risk taking by some financial institutions, pushed the world financial system to the brink of systemic failure in 2008. As a consequence of this near catastrophe, both regulators and investors have become keenly interested in developing tools for monitoring systemic risk. But this is easier said than done. Securitization, private transacting, complexity, and "flexible" accounting 6 prevent us from directly observing the many explicit linkages of financial institutions. As an alternative, we introduce a measure of implied systemic risk called the absorption ratio, which equals the fraction of the total variance of a set of asset returns explained or "absorbed" by a fixed number of eigenvectors. 7 The absorption ratio captures the extent to which markets are unified or tightly coupled. When markets are tightly 1 We thank Timothy Adler, Robin Greenwood, and participants of seminars at the European Quantitative Forum, the International Monetary Fund, PIMCO, QWAFAFEW, and State Street Associates for helpful comments.

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is vice president of research and development. He manages the development of Windham Portfolio Advisort investment technology and overseas research and development of IT-based tools and strategies to support our advisory and asset management service. Before his association with Windham, he was a member of the research group at State Street Associates, where he conducted portfolio construction and risk management analyses. He received Bachelor of Computer Systems Engineering and Bachelor of applied Computer Science degrees from the Royal Melbourne Institute of Technology and a Master of Business Administration degree from the Carroll Graduate School of Management at Boston College.

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