Default Risk Shocks of Financial Institutions as a Systemic Risk Indicator

Jack Bao, Kewei Hou and Zenon Taoushianis
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Jack Bao: U of Delaware
Kewei Hou: Ohio State U
Zenon Taoushianis: U of Southampton

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: We construct a measure of systemic risk, DRSFIN, that combines the high frequency information available in equity returns with a simple structural model of default. DRSFIN predicts future bank failures even after controlling for bank characteristics, macroeconomic conditions, uncertainty, and existing measures of aggregate systemic risk. We then show that DRSFIN is able to predict aggregate loan growth and nonfinancial firm failure, indicating that it not only predicts disruption in the financial sector, but also has real effects. Finally, we show that DRSFIN is also associated with elevated market uncertainty and stress in international markets.

JEL-codes: E44 E66 G01 G13 G21 (search for similar items in EconPapers)
Date: 2024-08
New Economics Papers: this item is included in nep-fdg and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2024-16

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