Market Systemic Risk, Predictability, and Macroeconomics News

Abstract

This paper proposes a novel and intuitive indicator to measure market systemic risk. Using this indicator, we examine how responsive the integration of various hedging assets to a change in the market integration of equity markets. We formulate the risk indicator based on a measure of cross-sectional dependence that is robust to persistent and long-memory stochastic processes. In an analysis of 14 global equity markets and 10 hedging assets from January 1999 to December 2021, we demonstrate the usefulness of our indicator by showing its ability of accurately tracking international market fluctuations and its out-of-sample performance for predicting the U.S. equity market. We further analyze the impact of the U.S. macroeconomics news on market systemic risk, with the objectiveness of both measuring the change of market systemic risk and understanding how it links to various macroeconomic factors. In particular, we find that, in the long-run, monetary policy actions have a steady impact on market systemic risk regardless of whether policy changes are expected.