Sentiment, Asset Prices, and Systemic Risk

31 Pages Posted: 3 Nov 2011 Last revised: 21 Mar 2012

Giovanni Barone-Adesi

Swiss Finance Institute at the University of Lugano; Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne

Loriano Mancini

Ecole Polytechnique Fédérale de Lausanne; Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne

Hersh Shefrin

Santa Clara University - Leavey School of Business

Date Written: March 20, 2012

Abstract

Regulators charged with monitoring systemic risk need to focus on sentiment as well as narrowly defined measures of systemic risk. This chapter describes techniques for jointly monitoring the co-evolution of sentiment and systemic risk. To measure systemic risk, we use Marginal Expected Shortfall. To measure sentiment, we apply a behavioral extension of traditional pricing kernel theory, which we supplement with external proxies. We illustrate the technique by analyzing the dynamics of sentiment before, during, and after the global financial crisis which erupted in September 2008. Using stock and options data for the S&P 500 during the period 2002–2009, our analysis documents the statistical relationship between sentiment and systemic risk.

Keywords: systemic risk, marginal expected shortfall, pricing kernel, overconfidence, optimism

JEL Classification: E61, G01, G02, G28

Suggested Citation

Barone-Adesi, Giovanni and Mancini, Loriano and Shefrin, Hersh, Sentiment, Asset Prices, and Systemic Risk (March 20, 2012). Swiss Finance Institute Research Paper No. 11-50. Available at SSRN: https://ssrn.com/abstract=1953621 or http://dx.doi.org/10.2139/ssrn.1953621

Giovanni Barone-Adesi

Swiss Finance Institute at the University of Lugano ( email )

Via Buffi 13
CH-6904 Lugano
Switzerland
+41 58 666 4671 (Phone)
+41 58 666 46 47 (Fax)

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

Loriano Mancini

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny
Bâtiment Extranef
1015 Lausanne, CH-1015
Switzerland

HOME PAGE: http://sfi.epfl.ch/mancini.html

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

Hersh Shefrin (Contact Author)

Santa Clara University - Leavey School of Business ( email )

Dept. of Finance
Santa Clara, CA 95053
United States
408-554-6893 (Phone)
408-554-4029 (Fax)

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