Assessing Systematic Risk in the S&P500 Index between 2000 and 2011: A Bayesian Nonparametric Approach

CAFIN Working Paper No. 3

31 Pages Posted: 7 Jun 2014

See all articles by Abel Rodriguez

Abel Rodriguez

University of California, Santa Cruz

Ziwei Wang

University of California, Santa Cruz - Division of Social Sciences

Athanasios Kottas

University of California, Santa Cruz

Date Written: June 4, 2014

Abstract

We develop a Bayesian nonparametric model to assess the effect of systematic risks on multiple financial markets, and apply it to understand the behavior of the S&P500 sector indexes between January 1, 2000 and December 31, 2011. More than prediction, our main goal is to understand the evolution of systematic and idiosyncratic risks in the U.S. economy over this particular time period, leading to novel sector specific risk indexes. To accomplish this goal, we model the appearance of extreme losses in each market using a superposition of two Poisson processes, one that corresponds to systematic risks that are shared by all sectors, and one that correspond to the idiosyncratic risk associated with a specific sector. In order to capture changes in the risk structure over time, the intensity functions associated with each of the underlying components are modeled using a Dirichlet process mixture model. Among other interesting results, our analysis of the S&P500 index suggests that there are few idiosyncratic risks associated with the consumer staples sector, whose extreme negative log returns appear to be driven mostly by systematic risks.

Suggested Citation

Rodriguez, Abel and Wang, Ziwei and Kottas, Athanasios, Assessing Systematic Risk in the S&P500 Index between 2000 and 2011: A Bayesian Nonparametric Approach (June 4, 2014). CAFIN Working Paper No. 3, Available at SSRN: https://ssrn.com/abstract=2446739 or http://dx.doi.org/10.2139/ssrn.2446739

Abel Rodriguez (Contact Author)

University of California, Santa Cruz ( email )

1156 High St
Santa Cruz, CA 95064
United States

Ziwei Wang

University of California, Santa Cruz - Division of Social Sciences ( email )

United States

Athanasios Kottas

University of California, Santa Cruz ( email )

1156 High St
Santa Cruz, CA 95064
United States

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