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Working Paper

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

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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.
Topics
Econometrics modeling and forecasting
Financial stability
02.19.2016ISSN 2573-7953 WP 16-08Revisions WP 16-08RDOI 10.26509/frbc-wp-201608
Keywords financial stability, systemic risk, investor sentiment, risk management
JEL Classification Codes G01, G11, G12, G18, G28

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Ergungor, O. Emre. 2016. “Where the Wild Things Are: Measuring Systemic Risk through Investor Sentiment.” Federal Reserve Bank of Cleveland, Working Paper No. 16-08. https://doi.org/10.26509/frbc-wp-201608