Default Risk Shocks of Financial Institutions as a Systemic Risk Indicator

48 Pages Posted: 22 Aug 2024

See all articles by Jack Bao

Jack Bao

University of Delaware - Department of Finance

Kewei Hou

Ohio State University (OSU) - Department of Finance

Zenon Taoushianis

University of Southampton - Department of Banking and Finance

Date Written: August 19, 2024

Abstract

We construct a measure of systemic risk, DRSFIN, that combines the high frequency information available in equity returns with a simple structural model of default. DRSFIN predicts future bank failures even after controlling for bank characteristics, macroeconomic conditions, uncertainty, and existing measures of aggregate systemic risk. We then show that DRSFIN is able to predict aggregate loan growth and nonfinancial firm failure, indicating that it not only predicts disruption in the financial sector, but also has real effects. Finally, we show that DRSFIN is also associated with elevated market uncertainty and stress in international markets.

Keywords: Systemic risk, financial institutions, distance-to-default, value-at-risk

JEL Classification: G01, G13, G21, E44, E66

Suggested Citation

Bao, Jack and Hou, Kewei and Taoushianis, Zenon, Default Risk Shocks of Financial Institutions as a Systemic Risk Indicator
(August 19, 2024). Fisher College of Business WP No. 2024-03-16 and Charles A. Dice Working Paper No. 2024-03-16, Available at SSRN: https://ssrn.com/abstract=4932967 or http://dx.doi.org/10.2139/ssrn.4932967

Jack Bao

University of Delaware - Department of Finance ( email )

Alfred Lerner College of Business and Economics
Newark, DE 19716
United States

Kewei Hou (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-0552 (Phone)
614-292-2418 (Fax)

Zenon Taoushianis

University of Southampton - Department of Banking and Finance ( email )

Southampton
United Kingdom

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