Options-based systemic risk, financial distress, and macroeconomic downturns

Bevilacqua, Mattia, Tunaru, Radu and Vioto, Davide (2020) Options-based systemic risk, financial distress, and macroeconomic downturns. Systemic Risk Centre Discussion Papers (107). Systemic Risk Centre, The London School of Economics and Political Science, London, UK.

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Abstract

In this study, we propose an implied forward-looking measure for systemic risk that employs the information from put option prices, the Systemic Options Value-at-Risk (SOVaR). This new measure can capture the buildup stage of systemic risk in the financial sector earlier than the standard stock market-based systemic risk measures (SRMs). Non-parametric tests show that our measure exhibits more timely early warning signals (up to one month earlier) regarding the main turbulent events around the global financial crisis of 2007-2009 than the three main stock market-based SRMs. Moreover, this new measure also shows significant predictive power with respect to macroeconomic downturns as well as future recessions. Our results are robust to various specifications, breakdowns of financial sectors, and controlling for the other main risk measures proposed in the literature.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.systemicrisk.ac.uk/
Additional Information:	© 2020 The Authors
Divisions:	Systemic Risk Centre
Subjects:	H Social Sciences > HG Finance H Social Sciences > HC Economic History and Conditions
JEL classification:	G - Financial Economics > G0 - General > G00 - General G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies G - Financial Economics > G2 - Financial Institutions and Services > G20 - General
Date Deposited:	18 May 2023 15:00
Last Modified:	15 Sep 2023 23:59
URI:	http://eprints.lse.ac.uk/id/eprint/118850

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