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

Mattia Bevilacqua, Radu Tunaru and Davide Vioto

Journal of Financial Markets, 2023, vol. 65, issue C

Abstract: We extract an option-implied measure for systemic risk, the Systemic Options Value-at-Risk (SOVaR), from put option prices that can capture the buildup stage of systemic risk in the financial sector earlier than the standard systemic risk measures (SRMs). Our measure exhibits more timely early warning signals of main events around the global financial crisis than the main SRMs. SOVaR shows significant predictive power for macroeconomic downturns as well as future recessions up to one year ahead. Our results are robust to various specifications, breakdowns of financial sectors, and controlling for other main risk measures proposed in the literature.

Keywords: Systemic risk; Options prices; Financial distress; Macro-finance; Financial stability (search for similar items in EconPapers)
JEL-codes: C58 G01 G14 G20 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:65:y:2023:i:c:s1386418123000320

DOI: 10.1016/j.finmar.2023.100834

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