Is Size Everything?
AbstractWe comprehensively account for systemicness by constructing risk factors based on thresh-
old size, interconnectedness (IC), complexity, leverage, and liquidity. We nd that, prior to 2007,
our big-versus-huge threshold size factor TSIZE, constructed from equity returns of large
financial firms, is a sucient statistic for systemicness. The largest 10% of rms by market size
load negatively on it, implying a SIFI discount", while the remaining firms load positively
on TSIZE, implying a SIFI premium." The TSIZE subsidy increases around Fitch Support
Rating changes indicating a higher probability of government support and also after the failure
of Continental Illinois in 1984. However, following Lehman's failure in September 2008, IC
risk becomes more signicant while TSIZE risk collapses, suggesting that the market starts to
discriminate between these risks. Pre-2007 TSIZE loadings are predictive of changes in systemic risk in the time series and the cross-section, forecasting up to 21% of the actual increase
in several systemic risk measures (such as SRISK) in the 5 months following Lehman's failure,
after accounting for size, leverage, and correlation. The results, which survive a wide variety
of robustness checks, indicate that while systemic risk comes in dierent guises, it has a broad
impact on resource allocation by increasing the cost of capital of all but the largest firms.