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Where the Wild Things Are: Measuring Systemic Risk through Investor Sentiment

Author

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  • O. Emre Ergungor

Abstract

In this paper, I develop a systemic risk measure derived from investor sentiment that has predictive power over future economic activity and market returns. Unlike existing measures, it is not focused on flagging investors? heightened awareness of risk at the end of a boom episode but rather on capturing shifts in their trading behavior at the beginning of the episode. The method allows investors and regulators to observe industries in which risks could be building and provides regulators some lead time in deploying their macroprudential tools.

Suggested Citation

  • O. Emre Ergungor, 2016. "Where the Wild Things Are: Measuring Systemic Risk through Investor Sentiment," Working Papers (Old Series) 1608, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:1608
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    More about this item

    Keywords

    Financial stability; Systemic risk; Investor sentiment; Risk management;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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