Systemic risk analysis using forward-looking Distance-to-Default series

Martin Saldias

Journal of Financial Stability, 2013, vol. 9, issue 4, 498-517

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) they capture interdependence 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.

Keywords: Contingent Claims Analysis; Systemic risk; Banking crises (search for similar items in EconPapers)
JEL-codes: G01 G13 G21 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1572308913000521
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Systemic Risk Analysis using Forward-Looking Distance-to-Default Series (2012)
Working Paper: Systemic risk analysis using forward-looking distance-to-default series (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:9:y:2013:i:4:p:498-517

DOI: 10.1016/j.jfs.2013.07.003

Access Statistics for this article

Journal of Financial Stability is currently edited by I. Hasan, W. C. Hunter and G. G. Kaufman

More articles in Journal of Financial Stability from Elsevier
Bibliographic data for series maintained by Catherine Liu ().