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Practical Applications

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Practical Applications of Principal Components as a Measure of Systemic Risk

Mark Kritzman, Yuanzhen Li, Sébastien Page, Roberto Rigobon and Cathy Scott
Practical Applications Fall 2013, 1 (2) DOI: https://doi.org/10.3905/pa.2013.1.2.016
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Yuanzhen Li
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Sébastien Page
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Principal Components as a Measure of Systemic Risk Mark Kritzman Yuanzhen Li Sébastien Page Roberto Rigobon

Abstract

Monitoring systemic risk has become a top priority for regulators and investors, and this Practical Applications report explores research about the use of asset prices to judge the level of implied systemic risk in the marketplace.

In Principal Components as a Measure of Systemic Risk , which was published in the Summer 2011 issue of The Journal of Portfolio Management , the authors introduce an asset price-centric metric called the absorption ratio.

In Toward Determining Systemic Importance , which was published in the Summer 2012 issue of JPM, the authors explore the practical applications of the absorption ratio by applying the methodology to a sample of industry returns for the U.S. stock market and for company returns within the U.S. and global financial sectors.

Mark Kritzman, President and CEO of Windham Capital Management in Boston and a co-author of the two articles, tells us how to use the absorption ratio as a signal.

  • The content is made available for your general information and use and is not intended for trading or other specific investment advice purposes or to address your particular requirements. We do not represent or endorse the accuracy or reliability of any advice, opinion, statement, or other information provided any user of this publication. Reliance upon any opinion, advice, statement, or other information shall also be at your own risk. Independent advice should be obtained before making any such decision. Any arrangements made between you and any third party named in this publication are at your sole risk.
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Practical Applications: 1 (2)
Practical Applications
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Practical Applications of Principal Components as a Measure of Systemic Risk
Mark Kritzman, Yuanzhen Li, Sébastien Page, Roberto Rigobon
Practical Applications Oct 2013, 1 (2) DOI: 10.3905/pa.2013.1.2.016

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Practical Applications of Principal Components as a Measure of Systemic Risk
Mark Kritzman, Yuanzhen Li, Sébastien Page, Roberto Rigobon
Practical Applications Oct 2013, 1 (2) DOI: 10.3905/pa.2013.1.2.016
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