Fragility,stress, and market returns |
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Affiliation: | 1. Department of Banking and Finance, Monash Business School, Monash University, Caulfield Campus. PO Box 197, Caulfield East, Victoria 3145, Australia;2. Deceased;3. Centre for Financial Econometrics, Department of Finance, Deakin Business School, Deakin University, Victoria 3125, Australia |
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Abstract: | We propose a novel risk measure that relates to subsequent negative conditional stock market returns. Our risk measure considers both the fragility and stress of the market. Fragility is measured by the Fragility Index developed by Berger and Pukthuanthong (2012) and market stress is based on several economic variables. Results show that incorporating both market stress and fragility improves the information content of a risk measure. Our risk measure relates to poor subsequent monthly market returns. We show the risk measure contains predictive information in a purely ex-ante specification. |
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Keywords: | Financial crises Systemic risk Market stress |
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