Author(s)

Zichao Wen

Corresponding Author

Zichao Wen

ABSTRACT

Motivated by the difficulty in measuring systemic risk, this paper constructs two systemic risk indicators based on two different set of variables: macroeconomic variables and industries portfolios returns. We examine which one of these two types of variables is better than the other in tracking underlying systemic risk. Furthermore, we investigate the predictability of both indicators for financial asset returns. The Vector Auto Regressing (VAR) analysis shows that systemic risk constructed based on macroeconomic variables has significant predictive power for the future asset returns and is better than the risk indicator based on industry portfolio returns.

KEYWORDS

Systemic risk, macroeconomic variables, industries portfolios, principal component analysis, SR, absorption-ratio, VAR