Where the Wild Things Are: Measuring Systemic Risk Through Investor Sentiment
96 Pages Posted: 24 Feb 2016 Last revised: 11 Aug 2016
Date Written: February 19, 2016
In this paper, I develop a systemic risk measure derived from investor sentiment that has predictive power over future economic activity and market returns. Unlike existing measures, it is not focused on flagging investors’ heightened awareness of risk at the end of a boom episode but rather on capturing shifts in their trading behavior at the beginning of the episode. The method allows investors and regulators to observe industries in which risks could be building and provides regulators some lead time in deploying their macroprudential tools.
Keywords: G01, G11, G12, G18, G28
JEL Classification: Financial stability, Systemic risk, Investor sentiment, Risk management
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