Systematic cyclicality of systemic bubbles: Evidence from the U.S. commercial banking system

Myeong Hyeon Kim and Baeho Kim

Journal of Macroeconomics, 2014, vol. 42, issue C, 281-297

Abstract: This paper investigates the extent of vulnerability in the U.S. commercial banking system through a pro-cyclical interaction between the market-wide risk perception and system-wide asset management behavior. Based on a Markov regime-switching model, the proposed diagnostic framework clearly illustrates its ability to provide an early warning signal of the build-up and unwinding of fragility in the financial system and the real economy for a counter-cyclical structure of regulatory policy. Empirical results demonstrate an asset pricing implication, as the proposed systemic bubble index is a significant factor that affects the investment opportunity set of stock investors for financial firms but not for non-financial firms.

Keywords: Systemic bubble; Financial crisis; Cyclicality; Early warning signal; Markov regime-switching model (search for similar items in EconPapers)
JEL-codes: C13 G01 G21 G28 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:42:y:2014:i:c:p:281-297

DOI: 10.1016/j.jmacro.2014.10.001

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