Systemic Risk and the Macroeconomy: An Empirical Evaluation

Abstract

This article evaluates a large collection of systemic risk measures based on their ability to predict macroeconomic downturns. We evaluate 19 measures of systemic risk in the US and Europe spanning several decades. We propose dimension reduction estimators for constructing systemic risk indexes from the cross section of measures and prove their consistency in a factor model setting. Empirically, systemic risk indexes provide significant predictive information out-of-sample for the lower tail of future macroeconomic shocks.

Why are REITS Currently So Expensive?

“…Appendix uses data on the probability of a macroeconomic disaster from Siriwardane () and Giglio, Kelly and Pruitt (), and data on the intermediary equity capital ratio from He, Kelly and Manela () to explore the conjectured hedging benefits of REITS. It finds that REITS are exposed to increases in left‐tail risk and to deteriorations in intermediary equity capital ratios, rather than being a hedge for these risks.…”

Bank size, capital, and systemic risk: Some international evidence

“…The significance of these results is robust to the sample, to the metric of systemic risk used, and to a range of controlled for bank attributes. Billio et al (2012) and Giglio et al (2013) show that a combination of systemic risk measures has more predictive power in explaining bank performance during crisis events than a single measure of systemic risk. Therefore to guide policy it is critically important to consider alternative measures of systemic risk.…”

Tail Risk Networks of Insurers Around the Globe: An Empirical Examination of Systemic Risk for G‐SIIs vs Non‐G‐SIIs

“…We also compare these systemic risk measures to see if they contain information correlated with macroeconomic risk or crisis. To this end, we follow Giglio, Kelly, and Pruitt () to use four macroeconomic indices: the Chicago Fed National Activity Index (CFNAI) and its 3‐month moving average (CFNAI‐MA3), the industry production (IP) growth in the United States and EU…”

“…They also prove that under certain conditions ΔCoVaR of an institution is proportional to its VaR, and, as a consequence, forecasting the systemic contribution of a firm is equivalent to forecasting its tail risk. Giglio, Kelly, and Pruitt () quantitatively evaluate 19 systemic risk measures (including MES, SRISK, ΔCoVaR) based on their relevance to forecasting real economic downturns. They find that individual systemic risk measures do not possess significant predictive power for macroeconomic lower tail risks, but systemic risk indices constructed from these individual measures do.…”