Measuring Global Systemic Risk: What are Markets Saying About Risk?

Abstract

Extreme market movements, especially in recent years, prompt our efforts to better understand the complexities of market dynamics. This paper seeks a better understanding of the features that characterize market environments through time. Specifically, we first demonstrate how market distress impacts return distributions. We then propose a global systemic risk indicator that jointly connects market conditions across asset classes using a multivariate failure model. The systemic risk barometer we devise determines how a set of complex, interconnected attributes coordinate in a way that describes turbulent market environments and the likelihood that markets are either in or entering a crisis phase. By combining high frequency information that measure changes in key variables across time and across markets, our risk hazard model yields valuable insight into the changing nature of market risks over time both within and across markets.