Systemic Risk in the Financial Sector: What Can We Learn from Option Markets?
SAFE Working Paper No. 25
47 Pages Posted: 16 Jul 2013 Last revised: 18 Jan 2015
Date Written: December 14, 2014
We propose a novel approach on how to estimate systemic risk and identify its key determinants. For US financial companies with publicly traded equity options, we extract option-implied value-at-risks and measure the spillover effects between individual company value-at-risks and the option-implied value-at-risk of a financial index. First, we study the spillover effect of increasing company risks on the financial sector. Second, we analyze which companies are mostly affected if the tail risk of the financial sector increases. Key metrics such as size, leverage, market-to-book ratio and earnings have a significant influence on the systemic risk profiles of financial institutions.
Keywords: Systemic risk, Value-at-risk, Equity options, Implied volatility, Panel vector autoregression
JEL Classification: G01, G28, G32
Suggested Citation: Suggested Citation