How Does Cyber Risk Impact Systemic Stability?

ABSTRACT This study investigates the relationship between cyber risk and systemic risk using firm‐level data from 2006 to 2018. We employ machine learning techniques to develop a predictive model for cyber risk and assess its impact on asset correlation, a proxy for systemic risk. Our analysis reveals that higher cyber risk is significantly associated with increased systemic risk. The results are robust across various checks, including the exclusion of financial firms and the financial crisis period. Furthermore, we find that the cyber‐related component of systemic risk has a substantial impact on future stock returns, indicating a significant risk premium. These findings highlight the importance of integrating cyber risk into traditional risk management and asset pricing models, providing valuable insights for investors and policymakers.