Default Risk Shocks of Financial Institutions as a Systemic Risk Indicator
48 Pages Posted: 22 Aug 2024
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: Suggested Citation
(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