Options-Based Systemic Risk, Financial Distress, and Macroeconomic Downturns

52 Pages Posted: 12 Jan 2021

See all articles by Mattia Bevilacqua

Mattia Bevilacqua

Systemic Risk Centre - London School of Economics

Radu Tunaru

University of Sussex

Davide Vioto

Bank of England

Date Written: December 14, 2020

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, Macro-finance, Financial Stability

JEL Classification: G01, G14, G20, C58

Suggested Citation

Bevilacqua, Mattia and Tunaru, Radu and Vioto, Davide, Options-Based Systemic Risk, Financial Distress, and Macroeconomic Downturns (December 14, 2020). Available at SSRN: https://ssrn.com/abstract=3748621

Mattia Bevilacqua (Contact Author)

Systemic Risk Centre - London School of Economics ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Radu Tunaru

University of Sussex ( email )

Jubilee
Brighton, BN1 9SL
United Kingdom

Davide Vioto

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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