April 1, 2011

Systemic risk across sectors; Are banks different?

This research compares systemic risk in the banking sector, the insurance sector, the construction sector, and the food sector. To measure systemic risk, we use extreme negative returns in stock market data for a time-varying panel of the 20 largest U.S. firms in each sector.

We find that systemic risk is significantly larger in the banking sector relative to the other three sectors. This result is robust to separating out correlations with an economy-wide stock market index. For the non-banking sectors, the ordering from high to low systemic risk is: insurance sector, construction sector, and food sector. The difference between the insurance sector and the construction sector is no longer significant after correcting for correlations with the economy as a whole. The correction has a large effect for the banking sector and the insurance sector, and a smaller effect for the other two sectors.