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

Mattia Bevilacqua, Radu Tunaru and Davide Vioto

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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: financial distress; financial stability; macro-finance; options prices; systemic risk (search for similar items in EconPapers)
JEL-codes: G14 G20 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2023-09-01
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-fdg and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published in Journal of Financial Markets, 1, September, 2023, 65. ISSN: 1386-4181

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:119289

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