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

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  • Kim, Myeong Hyeon
  • Kim, Baeho

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.

Suggested Citation

  • Kim, Myeong Hyeon & Kim, Baeho, 2014. "Systematic cyclicality of systemic bubbles: Evidence from the U.S. commercial banking system," Journal of Macroeconomics, Elsevier, vol. 42(C), pages 281-297.
    • Handle: RePEc:eee:jmacro:v:42:y:2014:i:c:p:281-297
    DOI: 10.1016/j.jmacro.2014.10.001
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    2. Uribe, Jorge M. & Chuliá, Helena & Guillén, Montserrat, 2017. "Uncertainty, systemic shocks and the global banking sector: Has the crisis modified their relationship?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 50(C), pages 52-68.
    3. Huang, Yan & Wan, Jiansong & Huang, Xin, 2019. "Quantitative analysis of financial system fragility based on manifold curvature," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 523(C), pages 1276-1285.

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    More about this item

    Keywords

    Systemic bubble; Financial crisis; Cyclicality; Early warning signal; Markov regime-switching model;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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