What Interbank Rates Tell Us About Time-Varying Disaster Risk

57 Pages Posted: 23 Oct 2019

See all articles by Hitesh Doshi

Hitesh Doshi

University of Houston - C.T. Bauer College of Business

Hyung Joo Kim

University of Houston - C.T. Bauer College of Business

Sang Byung Seo

University of Wisconsin - Madison

Date Written: October 13, 2019

Abstract

We characterize time-varying disaster risk using interbank rates and their options. The identification of disaster risk has remained a significant challenge due to the rarity of macroeconomic disasters. We make an identification assumption that macroeconomic disasters coincide with banking disasters -- extremely unlikely events in which the interbank market fails and investors suffer significant losses. Based on our flexible reduced-form setup, interbank rates together with their options allow us to extract the short-run and long-run components of disaster risk. Our estimation results serve as an external validity test of rare disaster models, which are typically calibrated to match stock moments.

Suggested Citation

Doshi, Hitesh and Kim, Hyung Joo and Seo, Sang Byung, What Interbank Rates Tell Us About Time-Varying Disaster Risk (October 13, 2019). Available at SSRN: https://ssrn.com/abstract=3469087 or http://dx.doi.org/10.2139/ssrn.3469087

Hitesh Doshi

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Hyung Joo Kim

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Sang Byung Seo (Contact Author)

University of Wisconsin - Madison ( email )

975 University Avenue
Madison, WI 53706-1324

HOME PAGE: http://sites.google.com/site/sangbyungseo

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