Can market risk explain the systemic risk? Evidence from the US banking industry

Research output: Contribution to journalArticlepeer-review

Abstract

Purpose: This paper sheds light on the impact of market risk measures on systemic risk. Market risk, which is captured by the volatility of stock market returns, is also decomposed into systematic and idiosyncratic risks.

Design/methodology/approach: The author uses the five-factor asset pricing model and systemic risk methodologies to derive market and systemic risk measures, respectively. Using a sample of 2,667 US banks for over 30 years and employing panel data estimation techniques, the author tests the said relationship.

Findings: It is shown that idiosyncratic risk can surge systemic risk, while systematic risk plays a less important role. Results survive a battery of tests, including different systemic risk measures, controlling causality and interacting with bank size, market fear and crisis periods.

Practical implications: These findings call for regulatory intervention, especially for large banks with high idiosyncratic risk.

Originality/value: This is the first paper that provides a more granular picture of the relationship between market and systemic risk from the US banking industry for more than 30 years.
Original languageEnglish
Pages (from-to)165-184
JournalJournal of Economic Studies
Volume51
Issue number1
Early online date23 May 2023
DOIs
Publication statusPublished - 2 Jan 2024

Keywords

  • Systemic risk
  • Market risk
  • Idiosyncratic risk
  • Systematic risk

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