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Jump Risk in the US Financial Sector
Author(s) -
Gajurel Dinesh,
Dungey Mardi,
Yao Wenying,
Jeyasreedharan Nagaratnam
Publication year - 2020
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/1475-4932.12565
Subject(s) - jump , index (typography) , equity (law) , systemic risk , economics , expected shortfall , systematic risk , economic capital , context (archaeology) , leverage (statistics) , financial sector , financial services , business , financial economics , finance , risk management , financial crisis , human capital , paleontology , physics , quantum mechanics , biology , world wide web , computer science , political science , law , macroeconomics , economic growth , machine learning
In this paper we establish empirical evidence for the relationship between the systematic jump betas of financial institutions and two types of systemic risk index: a capital shortfall index and a interconnectedness index. Using high‐frequency data for US financial sector stocks, we show that equity market jumps are positively related to capital shortfall and negatively related to interconnectedness. Higher potential capital shortfall measures of systemic risk lead to a greater sensitivity to systematic jumps, while increased interconnectedness leads to greater resistance. Our findings, along with indicators such as size and leverage, provide a means to identify the possible trade‐offs that regulators might face when assessing the systemic risks of financial institutions, particularly in the context of the cross‐multiple influences within the sector.