Quantifying Systemic Risk by Solutions of the Mean-Variance Risk Model

Jan Jurczyk, Alexander Eckrot and Ingo Morgenstern

PLOS ONE, 2016, vol. 11, issue 6, 1-12

Abstract: The world is still recovering from the financial crisis peaking in September 2008. The triggering event was the bankruptcy of Lehman Brothers. To detect such turmoils, one can investigate the time-dependent behaviour of correlations between assets or indices. These cross-correlations have been connected to the systemic risks within markets by several studies in the aftermath of this crisis. We study 37 different US indices which cover almost all aspects of the US economy and show that monitoring an average investor’s behaviour can be used to quantify times of increased risk. In this paper the overall investing strategy is approximated by the ground-states of the mean-variance model along the efficient frontier bound to real world constraints. Changes in the behaviour of the average investor is utlilized as a early warning sign.

Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:plo:pone00:0158444

DOI: 10.1371/journal.pone.0158444

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