Abstract
Technology firms are increasingly moving to finance. They are able to make use of a large stock of user data and offer a range of services that otherwise were not possible. This move may pose fresh challenges to financial stability. This paper empirically evaluates the tail risk and systemic risk of technology firms. Our data sample consists of technology firms, and for comparison we also evaluate the tail risk and systemic risk of finance firms. We use daily equity returns data from 2 April 1992 to 31 December 2019 and we adopt the univariate extreme value theory (EVT) to determine equity tail risk. Our selection criteria is the market capitalisation and we choose the top twenty technology and the top twenty finance firms to evaluate tail risk and systemic risk. We found that the tail risk of technology firms is higher than the financial firms, whereas they are less likely to be in distress conditional upon a shock from the system. However, this finding for technology firms reverses when we use recent data via our six-year rolling estimates. We conclude that, similar to finance firms, there should be tighter regulations for technology firms since technology firms are riskier than the finance firms. Our paper has significant implications for both national and global financial regulators.
1. Introduction
Financial technology (Fintech) is one of the stimulating and contemporary areas in global business today. The evolution of financial technology has, in a very short time, had a noticeable impact on how to carry out financial activities and transactions with customers. The investment in this industry is continuously increasing with no indication of stopping. KPMG (2017) report shows that there has been over US$ 100 billion invested into financial technology (firms?) during the last five years from 2011-2016. Similarly, since 2009, the market capitalisation (how the stock markets value firms) of the top ten BigTech firms have multiplied five times. (See Fig. 1). In 1999, there were only five tech firms among the top ten big firms by market capitalisation, which reduced to one in 2009. However, the number of BigTech firms in the top ten overall firms increased to seven in 2019. (See Fig. 2). With the entry of BigTech firms into the financial services market, the term Fintech has evolved to represent technology firms providing financial services. The BigTech companies’ entry into the financial services market is based on the premise of innovation, efficiency and financial inclusion (FSB, 2019; BIS annual economic report, 2019). However, their entry poses risks to the financial system and has implications for financial stability (FSB, 2019). Despite the huge growth of BigTech and the certainty of their risk to the financial system, there is no empirical study measuring the extent of the risk that BigTech firms carry,= and how much risk they pose to the financial system, as well as how likely they are to be affected by unforeseen market events such as COVID-19, the dot com bubble or GFC. In this paper, we study the tail risk and systemic risk of BigTech firms. For the purpose of comparison, we also measure the tail risk and systemic risk of finance firms.
