Systemic risk in the financial sector: What can se learn from option markets?

Holger Kraft and Alexander Schmidt

No 25, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: In this paper, we propose a novel approach on how to estimate systemic risk and identify its key determinants. For all US financial companies with publicly traded equity options, we extract their option-implied value-at-risks (VaRs) and measure the spillover effects between individual company VaRs and the option-implied VaR of an US financial index. First, we study the spillover effect of increasing company risks on the financial sector. Second, we analyze which companies are most affected if the tail risk of the financial sector increases. We find that key accounting and market valuation metrics such as size, leverage, balance sheet composition, market-to-book ratio and earnings have a significant influence on the systemic risk profile of a financial institution. In contrast to earlier studies, the employed panel vector autoregression (PVAR) estimator allows for a causal interpretation of the results.

Keywords: Systemic risk; Value-at-risk; Equity options; Implied volatility (search for similar items in EconPapers)
JEL-codes: G01 G28 G32 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-cfn and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:25

DOI: 10.2139/ssrn.2294349

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