Too-Systemic-to-Fail: What Option Markets Imply about Sector-Wide Government Guarantees

Bryan Kelly, Hanno Lustig and Stijn Van Nieuwerburgh

American Economic Review, 2016, vol. 106, issue 6, 1278-1319

Abstract: We examine the pricing of financial crash insurance during the 2007-2009 financial crisis in US option markets, and we show that a large amount of aggregate tail risk is missing from the cost of financial sector crash insurance during the crisis. The difference in costs between out-of-the-money put options for individual banks and puts on the financial sector index increases four-fold from its precrisis 2003-2007 level. We provide evidence that a collective government guarantee for the financial sector lowers index put prices far more than those of individual banks and explains the increase in the basket-index put spread.

JEL-codes: E44 G01 G13 G21 G28 H81 (search for similar items in EconPapers)
Date: 2016
Note: DOI: 10.1257/aer.20120389
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Citations: View citations in EconPapers (96)

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Related works:
Working Paper: Too-Systemic-To-Fail: What Option Markets Imply About Sector-wide Government Guarantees (2012)
Working Paper: Too-Systemic-To-Fail: What Option Markets Imply About Sector-wide Government Guarantees (2011)
Working Paper: Too-Systemic-To-Fail: What Option Markets Imply About Sector-wide Government Guarantees (2011)
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