Systemic Risk and Severe Economic Downturns

Bertrand Maillet, Massimiliano Caporin, Michele Costola and Jean-Charles Garibal
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Bertrand Maillet: EM - EMLyon Business School
Massimiliano Caporin: Unipd - Università degli Studi di Padova = University of Padua
Michele Costola: University of Venice Ca’ Foscari = Université de Venise Ca’ Foscari = Università Ca’ Foscari di Venezia
Jean-Charles Garibal: EESC-GEM - Grenoble Ecole de Management

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Abstract: Recent studies indicate that systemic risk has predictive power over severe economic downturns. We propose a novel methodology that employs sparsity and targeting approaches to optimally select and combine systemic risk measures to forecast the tail of a given economic variable. Out-of-sample analysis shows that the optimal combination of systemic risk metrics may vary over time, forecasting horizons and economic proxies. Moreover, a few systemic risk measures contain all the important information for capturing the relation between systemic risk and real economy; therefore, a fixed and static combination approach may not be optimal, and the flexible parsimonious extension we introduce leads to improvement in forecasting performance.

Keywords: Sparse PCA; Systemic risk; financial crisis (search for similar items in EconPapers)
Date: 2022-01-01
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Published in Journal of banking & finance = Journal of banking and finance, 2022, ⟨10.1016/j.jbankfin.2021.106339⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:gemptp:hal-05721208

DOI: 10.1016/j.jbankfin.2021.106339

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