The systemic risk approach based on implied and realized volatility

Paweł Sakowski, Rafał Sieradzki and Robert Ślepaczuk
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Paweł Sakowski: University of Warsaw, Faculty of Economic Sciences, Department of Quantitative Finance, Quantitative Finance Research Group
Rafał Sieradzki: New York University Stern School of Business; Cracow University of Economics

No 2023-07, Working Papers from Faculty of Economic Sciences, University of Warsaw

Abstract: We propose a new measure of systemic risk to analyze the impact of the major financial market turmoils in the stock markets from 2000 to 2021 in the USA, Europe, Brazil, and Japan. Our Implied Volatility Realized Volatility Systemic Risk Indicator (IVRVSRI) shows that the reaction of stock markets varies across different geographical locations and the persistence of the shocks depends on the historical volatility and long-term average volatility level in a given market. The methodology applied is based on the logic “the simpler is always better than the more complex, if it leads to the same results”. Such an approach significantly limits the model risk and substantially decreases computational burden. Robustness checks show that IVRVSRI is a precise measure of the current systemic risk in the stock markets. Moreover, IVRVSRI seems to be a valid indication of current systemic risk in equity markets and it can be used for other types of assets and high-frequency data.

Keywords: systemic risk; implied volatility; realized volatility; volatility indices; equity index options; market volatility (search for similar items in EconPapers)
JEL-codes: C22 C61 G14 G15 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2023
New Economics Papers: this item is included in nep-ban, nep-fmk and nep-rmg
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https://www.wne.uw.edu.pl/download_file/2577/0 First version, 2023 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:war:wpaper:2023-07

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