Systemic Risk Analysis using Forward-Looking Distance-to-Default Series

Martin Saldias

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: Based on Contingent Claims Analysis, this paper develops a method to monitor systemic risk in the European banking system. Aggregated Distance-to-Default series are generated using option prices information from systemically important banks and the STOXX Europe 600 Banks Index. These indicators provide methodological advantages in monitoring vulnerabilities in the banking system over time: 1) theycapture interdependences and joint risk of distress in systemically important banks; 2) their forward-looking feature endow them with early signaling properties compared to traditional approaches in the literature and other market-based indicators; 3) they produce simultaneously smooth and informative long-term signals and quick and clear reaction to market distress and 4) they incorporate additional information through option prices about tail risk and correlation breaks, in line with recent findings in the literature.

JEL-codes: G01 G13 G21 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-ban and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Systemic risk analysis using forward-looking Distance-to-Default series (2013)
Working Paper: Systemic risk analysis using forward-looking distance-to-default series (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ptu:wpaper:w201216

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