Options-based systemic risk, financial distress, and macroeconomic downturns

Mattia Bevilacqua, Radu Tunaru and Davide Vioto

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: In this study, we propose an implied forward-looking measure for systemic risk that employs the information from put option prices, the Systemic Options Value-at-Risk (SOVaR). This new measure can capture the buildup stage of systemic risk in the financial sector earlier than the standard stock market-based systemic risk measures (SRMs). Non-parametric tests show that our measure exhibits more timely early warning signals (up to one month earlier) regarding the main turbulent events around the global financial crisis of 2007-2009 than the three main stock market-based SRMs. Moreover, this new measure also shows significant predictive power with respect to macroeconomic downturns as well as future recessions. Our results are robust to various specifications, breakdowns of financial sectors, and controlling for the other main risk measures proposed in the literature.

Keywords: systemic risk; options market; financial distress; macrofinance; financial stability (search for similar items in EconPapers)
JEL-codes: G00 G14 G20 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2020-12-15
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:118850

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