Options-Based Systemic Risk, Financial Distress, and Macroeconomic Downturns
58 Pages Posted: 12 Jan 2021 Last revised: 9 Jun 2022
Date Written: December 14, 2020
We extract an implied forward-looking measure for systemic risk, the Systemic Options Value-at-Risk (SOVaR), from put option prices that can capture the buildup stage of systemic risk in the financial sector earlier than the standard stock market-based systemic risk measures (SRMs). Our measure exhibits more timely early warning signals regarding the main events around the global financial crisis of 2007–2009 than the main stock market-based SRMs. SOVaR also shows significant predictive power for macroeconomic downturns as well as future recessions that can be useful to investors in all companies. Our results are robust to breakdowns of financial sectors. We also test the impact of important regulations such as the Dodd-Frank act and we confirm that the regulation had an impact on decreasing systemic risk.
Keywords: Systemic Risk, Options Market, Financial Distress, Macro-finance, Financial Stability
JEL Classification: G01, G14, G20, C58
Suggested Citation: Suggested Citation