Options-Based Systemic Risk, Financial Distress, and Macroeconomic Downturns
52 Pages Posted: 12 Jan 2021
Date Written: December 14, 2020
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, Macro-finance, Financial Stability
JEL Classification: G01, G14, G20, C58
Suggested Citation: Suggested Citation