Does Systemic Risk in the Financial Sector Predict Future Economic Downturns?

85 Pages Posted: 12 Jun 2010 Last revised: 7 Jul 2012

Linda Allen

City University of New York, CUNY Baruch College - Zicklin School of Business - Department of Economics and Finance

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Yi Tang

Fordham University - Gabelli School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: July 7, 2012

Abstract

We derive a measure of aggregate systemic risk, designated CATFIN, that complements bank-specific systemic risk measures by forecasting macroeconomic downturns six months into the future using out-of-sample tests conducted with US, European and Asian bank data. Consistent with bank "specialness," the CATFIN of both large and small banks forecasts macroeconomic declines, whereas a similarly defined measure for both nonfinancial firms and simulated "fake banks" has no marginal predictive ability. High levels of systemic risk in the banking sector impact the macroeconomy through aggregate lending activity. A conditional asset pricing model shows that CATFIN is priced for financial and non-financial firms.

Keywords: Systemic risk, value at risk, expected shortfall, financial crisis, banking crises, Too Big to Fail

JEL Classification: G01, G21, G12, C13, C22

Suggested Citation

Allen, Linda and Bali, Turan G. and Tang, Yi, Does Systemic Risk in the Financial Sector Predict Future Economic Downturns? (July 7, 2012). Available at SSRN: https://ssrn.com/abstract=1623577 or http://dx.doi.org/10.2139/ssrn.1623577

Linda Allen (Contact Author)

City University of New York, CUNY Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States
646-312-3463 (Phone)
646-312-3451 (Fax)

HOME PAGE: http://stern.nyu.edu/~lallen

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: http://msbonline.georgetown.edu/faculty-research/msf-faculty/turan-bali

Yi Tang

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
New York, NY 10023
United States

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