Sentiment, Asset Prices, and Systemic Risk

2012 ◽  
Author(s):  
Giovanni Barone-Adesi ◽  
Loriano Mancini ◽  
Hersh M. Shefrin
Keyword(s):  
Systemic Risk ◽  
Asset Prices

scholarly journals Illiquidity and All Its Friends

2011 ◽  
Vol 49 (2) ◽  
pp. 287-325 ◽  
Author(s):  
Jean Tirole
Keyword(s):  
Adverse Selection ◽  
Systemic Risk ◽  
Information Acquisition ◽  
Asset Prices ◽  
Balance Sheet ◽  
Market Value ◽  
Capital Adequacy ◽  
Fire Sales ◽  
Liquidity Provision

The recent crisis was characterized by massive illiquidity. This paper reviews what we know and don't know about illiquidity and all its friends: market freezes, fire sales, contagion, and ultimately insolvencies and bailouts. It first explains why liquidity cannot easily be apprehended through a single statistic, and asks whether liquidity should be regulated given that a capital adequacy requirement is already in place. The paper then analyzes market breakdowns due to either adverse selection or shortages of financial muscle, and explains why such breakdowns are endogenous to balance sheet choices and to information acquisition. It then looks at what economics can contribute to the debate on systemic risk and its containment. Finally, the paper takes a macroeconomic perspective, discusses shortages of aggregate liquidity, and analyzes how market value accounting and capital adequacy should react to asset prices. It concludes with a topical form of liquidity provision, monetary bailouts and recapitalizations, and analyzes optimal combinations thereof; it stresses the need for macro-prudential policies. (JEL E44, G01, G21, G28, G32, L51)

scholarly journals Dynamic Interaction Between Asset Prices and Bank Behavior: A Systemic Risk Perspective

2018 ◽  
Vol 54 (4) ◽  
pp. 1505-1537 ◽  
Author(s):  
Aki-Hiro Sato ◽  
Paolo Tasca ◽  
Takashi Isogai
Keyword(s):  
Systemic Risk ◽  
Asset Prices ◽  
Dynamic Interaction ◽  
Bank Behavior

scholarly journals Crowded Trades, Market Clustering, and Price Instability

Entropy ◽  
2021 ◽  
Vol 23 (3) ◽  
pp. 336
Author(s):  
Marc van Kralingen ◽  
Diego Garlaschelli ◽  
Karolina Scholtus ◽  
Iman van Lelyveld
Keyword(s):  
Systemic Risk ◽  
Stock Price ◽  
Asset Prices ◽  
Stock Return ◽  
Causal Effect ◽  
Null Model ◽  
Price Stability ◽  
Return Distribution ◽  
Present Evidence ◽  
Price Instability

Crowded trades by similarly trading peers influence the dynamics of asset prices, possibly creating systemic risk. We propose a market clustering measure using granular trading data. For each stock, the clustering measure captures the degree of trading overlap among any two investors in that stock, based on a comparison with the expected crowding in a null model where trades are maximally random while still respecting the empirical heterogeneity of both stocks and investors. We investigate the effect of crowded trades on stock price stability and present evidence that market clustering has a causal effect on the properties of the tails of the stock return distribution, particularly the positive tail, even after controlling for commonly considered risk drivers. Reduced investor pool diversity could thus negatively affect stock price stability.

Speculative Bubbles and Financial Crises

2012 ◽  
Vol 4 (3) ◽  
pp. 184-221 ◽  
Author(s):  
Pengfei Wang ◽  
Yi Wen
Keyword(s):  
Systemic Risk ◽  
Financial Crises ◽  
Asset Prices ◽  
Asset Price ◽  
Real Economy ◽  
Positive Probability ◽  
The Real ◽  
Speculative Bubbles ◽  
Financial Bubbles ◽  
Intrinsic Values

Are asset prices unduly volatile and often detached from their fundamentals? Does the bursting of financial bubbles depress the real economy? This paper addresses these issues by constructing a DSGE model with speculative bubbles. We characterize conditions under which storable goods, regardless of their intrinsic values, can carry bubbles, and agents are willing to invest in such bubbles despite their positive probability of bursting. The results show that systemic risk, commonly perceived changes in the bubble's probability of bursting, can generate boom-bust cycles with hump-shaped output dynamics and produce asset price movements many times more volatile than the economy's fundamentals. (JEL E13, E23, E32, E44, G01, G12).

scholarly journals Sentiment in Central Banks’ Financial Stability Reports*

2020 ◽  
Author(s):  
Ricardo Correa ◽  
Keshav Garud ◽  
Juan M Londono ◽  
Nathan Mislang
Keyword(s):  
Monetary Policy ◽  
Systemic Risk ◽  
Financial Stability ◽  
Asset Prices ◽  
Banking Sector ◽  
Banking Crises ◽  
Central Banks ◽  
Percentage Point Increase ◽  
Financial Cycle ◽  
Point Increase

Abstract We use the text of financial stability reports (FSRs) published by central banks to analyze the relation between the sentiment they convey and the financial cycle. We construct a dictionary tailored specifically to a financial stability context, which classifies words as positive or negative based on the sentiment they convey in FSRs. With this dictionary, we construct financial stability sentiment (FSS) indexes for thirty countries between 2005 and 2017. We find that central banks’ financial stability communications are mostly driven by developments in the banking sector. Moreover, the sentiment captured by the FSS index explains movements in financial cycle indicators related to credit, asset prices, systemic risk, and monetary policy rates. Finally, our results show that the sentiment in central banks’ communications is a useful predictor of banking crises—a one percentage point increase in FSS is followed by a twenty-nine percentage point increase in the probability of a crisis.

Macroprudential Policy Instruments of Central Banks

2012 ◽  
pp. 32-47
Author(s):  
S. Andryushin ◽  
V. Kuznetsova
Keyword(s):  
Systemic Risk ◽  
Financial Stability ◽  
Financial System ◽  
Policy Instruments ◽  
Central Banks ◽  
Macroprudential Policy ◽  
Policy Studies ◽  
The Future ◽  
Financial Cycles

The paper analyzes central banks macroprudencial policy and its instruments. The issues of their classification, option, design and adjustment are connected with financial stability of overall financial system and its specific institutions. The macroprudencial instruments effectiveness is evaluated from the two points: how they mitigate temporal and intersectoral systemic risk development (market, credit, and operational). The future macroprudentional policy studies directions are noted to identify the instruments, which can be used to limit the financial systemdevelopment procyclicality, mitigate the credit and financial cycles volatility.

Risk Factors of Collateralized Loan Obligations and Corporate Bonds

2020 ◽  
Vol 32 (6) ◽  
pp. 347-355
Author(s):  
Mark Wahrenburg ◽  
Andreas Barth ◽  
Mohammad Izadi ◽  
Anas Rahhal
Keyword(s):  
Risk Factors ◽  
Risk Factor ◽  
Asset Pricing ◽  
Systemic Risk ◽  
Corporate Bonds ◽  
Risk Exposure ◽  
Expected Returns ◽  
Yield Spreads ◽  
Pricing Factors ◽  
Return Difference

AbstractStructured products like collateralized loan obligations (CLOs) tend to offer significantly higher yield spreads than corporate bonds (CBs) with the same rating. At the same time, empirical evidence does not indicate that this higher yield is reduced by higher default losses of CLOs. The evidence thus suggests that CLOs offer higher expected returns compared to CB with similar credit risk. This study aims to analyze whether this return difference is captured by asset pricing factors. We show that market risk is the predominant risk factor for both CBs and CLOs. CLO investors, however, additionally demand a premium for their risk exposure towards systemic risk. This premium is inversely related to the rating class of the CLO.

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