Systemic Risk and Sentiment Chapter Contribution to Handbook on Systemic Risk

Giovanni Barone-Adesi, Loriano Mancini and Hersh Shefrin
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Giovanni Barone-Adesi: Swiss Finance Institute and University of Lugano
Loriano Mancini: Swiss Finance Institute and EPFL
Hersh Shefrin: Leavey School of Business Santa Clara University

No 11-50, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

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: ystemic risk; Marginal Expected Shortfall; Pricing Kernel; Overconfidence; Optimism (search for similar items in EconPapers)
JEL-codes: E61 G01 G02 G28 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2011-10
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1150

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