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

58 Pages Posted: 12 Jan 2021 Last revised: 9 Jun 2022

See all articles by Mattia Bevilacqua

Mattia Bevilacqua

Systemic Risk Centre - London School of Economics; University of Liverpool Management School

Radu Tunaru

University of Sussex

Davide Vioto

European Banking Authority (EBA)

Date Written: December 14, 2020

Abstract

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

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 or http://dx.doi.org/10.2139/ssrn.3748621

Mattia Bevilacqua (Contact Author)

Systemic Risk Centre - London School of Economics ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

University of Liverpool Management School ( email )

Chatham St
Liverpool, L69 7ZH
United Kingdom

Radu Tunaru

University of Sussex ( email )

Jubilee
Brighton, BN1 9SL
United Kingdom

Davide Vioto

European Banking Authority (EBA) ( email )

20 avenue André Prothin CS 30154
One Canada Square, Canary Wharf
92927 Paris, La Défense CEDEX E14 5AA
France

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