Systemic risk and contagion in a stock market?
Best insight from top research papers
Systemic risk and contagion in a stock market can be measured and analyzed using various methods and factors. Heterogeneous investor activity and interconnections among investors play a significant role in systemic risk. Retail investors with positive net information flows can contribute to market instability, highlighting the importance of considering different investor groups in assessing systemic risk . Overlapping portfolios and the market price impact of asset deleveraging can also lead to financial contagion and systemic risk. Assessing contagion between individual institutions' portfolio holdings under stress scenarios can provide insights into systemic risk within the financial system . The introduction of non-central clearing in OTC derivatives markets may not necessarily reduce systemic risk, and factors such as network structure and risk exposure can affect systemic risk levels . Granger causal networks of stock markets can help analyze the causal relationships and contagion paths during crises, with certain markets playing a more influential role in systemic risk contagion . Excessive network connectedness among financial institutions can amplify financial shocks through contagion effects, and measuring correlation between institutions from multiple channels can provide insights into systemic risk .
Answers from top 5 papers
More filters
| Papers (5) | Insight |
|---|---|
21 Citations | The paper analyzes systemic risk contagion in China's financial system using various correlation measures and network analysis techniques. |
| The paper discusses systemic risk contagion in global stock markets during crises, highlighting the significant role of the American stock market and the short contagion path between markets. | |
5 Citations | The provided paper does not discuss systemic risk and contagion in a stock market. |
| The paper discusses the systemic risk induced by heterogeneous investor activity and how it contributes to market instability. It also highlights the importance of interconnectedness among investor groups in understanding systemic risk and its impact on expected returns. However, it does not specifically mention contagion in the stock market. | |
2 Citations | The paper discusses systemic risk and contagion within the euro area financial system, specifically focusing on the market price impact of asset deleveraging and assessing contagion between individual institutions' portfolio holdings. |
Related Questions
How does agent-based modelling contribute to understanding systemic risk in complex financial systems?4 answersAgent-based modeling plays a crucial role in comprehending systemic risk in complex financial systems by simulating interactions between agents and their strategies. These models capture the evolving nature of financial networks, where agents adapt risky or less risky investment strategies to maximize returns. By studying replicator dynamics, agent-based models reveal how strategies drive the financial network and can lead to systemic risk regimes if all agents blindly adopt risky strategies. Furthermore, these models help in identifying Systemically Important Financial Institutions (SIFIs) and measuring systemic risk by integrating direct and indirect contagion channels, enhancing the representation of financial systemic risk. Overall, agent-based modeling provides insights into the emergent behavior of financial systems, aiding in the assessment and mitigation of systemic risks.
What difference between financial contagion and interdependence?4 answersFinancial contagion refers to the spread of financial distress or shocks from one market to another, leading to a domino effect. On the other hand, interdependence in financial markets signifies the mutual reliance and interconnectedness among markets, where movements in one market can influence others. While contagion involves the transmission of negative events, interdependence reflects the broader concept of how markets are linked and affect each other in various ways. Studies have shown that during crises, such as the 2007 subprime financial crisis and the 2010 European sovereign debt crisis, contagion effects were observed between different markets, highlighting the vulnerability of interconnected financial systems. Understanding both contagion and interdependence is crucial for assessing systemic risks and enhancing financial stability.
Do ETFs contribute to systemic risk?5 answersETFs have the potential to contribute to systemic risk in financial markets. The increasing availability of ETFs allows investors to pursue new strategies and access new asset classes, which can impact the functioning of financial markets, especially during times of market stress. ETFs create deep and complex interconnections between market participants, extending to retail and institutional investors, and corporate behaviors and decisions. This interconnection creates direct and indirect systemic risk transmission pathways, with unique factors not present in other managed asset products. Misinformed trades by active traders in ETF markets may trigger more misinformed automated trades, undermining the price formation mechanism and reducing the informativeness of financial market pricing. There is a growing concern that ETFs pose new risks to market stability and performance, and it is important to have the right rules and oversight in place to manage these risks.
How do market participant behaviors affect abnormal trading risk contagion?5 answersMarket participant behaviors have a significant impact on abnormal trading risk contagion. Investor sensitivity to new information, investment decisions of neighboring investors, and investor understanding preference for new information influence investor sentiment and subsequently affect stock price volatility. Risk information dissemination, banks' information acquisition capability, and information disclosure strategies also play a role in risk contagion in the interbank market. In the NFT market, fraudulent behaviors such as wash trading can mislead other traders, and clustering algorithms can help identify and regulate such behaviors. Additionally, behavioral finance theories suggest that irrational behavior and herding mentality among investors contribute to shock spillovers and contagion in financial markets. Overall, market participant behaviors, including sensitivity to information, information acquisition, and fraudulent activities, have a significant impact on abnormal trading risk contagion.
What research exists on the interaction between abnormal trading financial risk contagion and market participant behavior?5 answersResearch has been conducted on the interaction between abnormal trading, financial risk contagion, and market participant behavior. Liu et al. found that individual investors in the Chinese stock market integrate climate risk into their investment decisions, shifting their assets from high-emission to low-emission companies during periods of abnormally high local temperatures. Song et al. highlighted the concerns of money laundering, fraud, and wash trading in the unregulated Non-Fungible-Token (NFT) market, and proposed using quantitative features and clustering algorithms to identify fraudulent behaviors and protect amateur traders. Ionășcuți and Dima examined financial contagion among 17 market indices and found evidence of contagion between some markets, with regional contagion observed during the COVID-19 pandemic. Zou et al. developed a big data investment analysis algorithm to detect abnormal transactions in the financial securities market, improving investment analysis accuracy and efficiency.
How do systemic risk is related to accounting and real estate and banks?5 answersSystemic risk is related to accounting and real estate in the banking sector. The size of large financial institutions, particularly shadow entities, increases systemic risk. Real estate finance services are sensitive to maturity mismatch and leverage, but not to size. Boom and bust cycles in real estate are a primary cause of financial crises, leading to risk shifting and asset substitution. Macroprudential policies, such as restrictions on loan-to-value ratios and countercyclical capital requirements, aim to prevent real estate bubbles. The National Bank of Belgium introduced a sectoral capital requirement to strengthen Belgian banks against adverse developments in the real estate market. Accounting measures, such as return-on-assets and loan-loss-reserves-to-gross-loans, are related to total and non-systematic risk in Asian banks. Systemic risk is significantly larger in the banking sector compared to the insurance, construction, and food sectors.