Systemic risk and severe economic downturns: A targeted and sparse analysis

Massimiliano Caporin, Michele Costola, Jean-Charles Garibal and Bertrand Maillet

Journal of Banking & Finance, 2022, vol. 134, issue C

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)
JEL-codes: C45 C53 C58 G01 G11 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:134:y:2022:i:c:s0378426621002909

DOI: 10.1016/j.jbankfin.2021.106339

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