Systemic Risk Measures: From the Panic of 1907 to the Banking Stress of 2023 (with Viral Acharya and Markus Brunnermeier) ***NEW VERSION***

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Abstract: We assess the efficacy of market-based systemic risk measures that rely on U.S. financial firms’ stock return co-movements with market- or sector-wide returns under stress from 1895 to 2023. Stress episodes are identified using corporate bond spread widening and narrative dating, spanning from the Panic of 1907 to the Banking Stress of 2023. Measures observed prior to the onset of stress episodes predict market outcomes (realized volatility and returns), balance sheet outcomes (lending, profitability, and run risk), and bank failures. Specifically, the measures are: (i) particularly effective in capturing the cross-sectional ranking of institutions conditional on a stress episode, rather than aggregate outcomes; (ii) more informative when stress episodes are severe; and (iii) relevant for both banks and non-bank financial institutions, although measures incorporating market leverage are especially informative for banks. A comparative analysis shows that market-based indicators offer information that is distinct from, and complementary to, traditional balance sheet metrics used in supervisory and macroprudential risk assessment.

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Presentations: EFI workshop, BSE Summer Forum Workshop on Financial Intermediation and Risks, AFA 2026

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Similar Investors (with Co-Pierre Georg and Sascha Steffen) ***NEW VERSION***

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Abstract: We test the prediction that investors divest from an asset in anticipation of large liquidation costs when their portfolio similarity with other asset holders is high. We provide evidence supporting this hypothesis using detailed data on money market funds that invest in the debt securities of financial institutions. We develop an instrument that exploits variation in portfolio similarity driven by idiosyncratic redemptions from other funds to confirm our results. Consistent with our hypothesis, the effect of portfolio similarity on divestment is stronger for ex-post illiquid securities, for more illiquid and diversified funds, and for actively managed institutional funds.

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VoxEU column (3/28/2023)

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Presentations: Norwegian School of Economics, CEBRA, BoE-CEPR-Imperial-LSE Conference on Non-bank Financial Sector and Financial Stability, Knut Wicksell Conference in Financial Intermediation, 13th Swiss Winter conference on Financial Intermediation (cancelled due to Covid19), Chicago Financial Institutions Conference (cancelled due to Covid19), CONSOB-ESMA-Bocconi serminar “Securities markets. Trends, risks and policies”, ESSEC Business School, 2023 Regulating Financial Markets conference, EEA 2023, AFA 2024, 1st CCA-ESCP Workshop on Financial Institutions and Corporate Finance, ECB Conference on Financial Stability and Macroprudential Policy 2025, 4th PSB Workshop on Banks and Financial Markets

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Stressed Banks (with Roberto Steri)

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Abstract: We investigate the risk taking of "stressed banks" — the large financial institutions that have been facing unprecedented regulatory supervision and capitalization requirements. We take steps towards identifying how supervision affects risk taking in the banking system. Supervision in Dodd-Frank Act distinctly improves borrower rating by 0.7 rating classes. Banks respond to supervision heterogeneously, depending on the capital charges associated with their investments. Ignoring the confounding effect of capital requirements misleads the conclusion that Dodd-Frank Act supervision is ineffective. Our results indicate that “stressed banks” are beneficial to financial stability as they are better capitalized and engage in safer lending.

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Featured in:

International Banker, "The Role of Stress-Test Supervision" (3/25/2019)

SFI's Practitioner Roundups August 2018

HECimpact November 2017

Covered in Le Temps (8/6/2018), Allnews (6/27/2018)

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Presentations: Luxembourg School of Finance, McGill University, Danmarks Nationalbank, BI Norwegian Business School, European Central Bank, Vienna Graduate School of Finance, Norges Bank, FINMA, IESE, Erasmus School of Economics, Bank of England, VU Amsterdam, Deutsche Bundesbank, Federal Reserve Board, Swiss National Bank, CRM Montreal Systemic Risk workshop, ELTE Budapest workshop on Stress Testing and Capital Requirements, 2017 Santiago Finance workshop, 11th Swiss Winter Conference on Financial Intermediation, 2018 Lausanne-Cambridge workshop, 5th Empirical Financial Intermediation Research Network, FEBS 2018, 35th Annual Conference of the French Finance Association, 4th IWH-FIN-FIRE Workshop on "Challenges for Financial Stability", 1st Endless Summer Conference on Financial Intermediation and Corporate Finance, 2018 Federal Reserve Stress Testing Research Conference, CEPR Systemic Risk and Macroprudential Policy conference of the Bank of Israel, Showcasing Women in Finance - EU, 10th European Banking Center Network, Marstrand Finance Conference, WFA, European System of Central Banks' Day‐Ahead Conference, AEA, EFA

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