Measuring Systemic Financial Stress and its Impact on the Macroeconomy
Thoughts
Connects with: @cardarelli2011 @hakkio2009 @hollo2012 @illing2006
Annotations
kremer2021 - p. 13
These market segments include: i) equity markets for nonfinancial corporations; ii) equity markets for financial institutions (listed banks and other traded financial entities); iii) money markets (interbank, commercial paper and T-bill markets); iv) sovereign and corporate bond markets; and v) foreign exchange markets.
kremer2021 - p. 18
The formula is well-known in finance, describing how to compute the return variance (risk) of an asset portfolio based on the return variances and covariances (or standard deviations and correlations) of a set of assets with equal portfolio shares (see, e.g., the seminal paper on portfolio selection by Markowitz (1952))
kremer2021 - p. 32
Such asymmetric responses of economic activity to financial distress may reflect several mechanisms put forward in the theoretical macro-finance literature, such as occasionally binding credit constraints in combination with fire sales amplifying the original shock (e.g, Bianchi (2011), He and Krishnamurthy (2012), Lorenzoni (2008) and Mendoza (2010)).
kremer2021 - p. 34
Most interesting in our context are the much stronger impacts of CISS shocks to the PMI and real GDP growth at the 90% quantile compared to the 10% quantile and the median responses. For instance, a CISS shock of +0.18 lowers the annual growth rate of real GDP by maximum 1.1% over a roughly one year horizon at the 90% quantile of the growth distribution, compared with −0.7% and −0.4% for the median and the 10% quantile, respectively. The differences are even starker for PMI responses to the same CISS shock, with the PMI declining by 2.5 points at the 90% quantile, 1.5 points at the median and 0.5 points at the 10% quantile.