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Default Risk Shocks of Financial Institutions as a Systemic Risk Indicator

Author

Listed:
  • Bao, Jack

    (U of Delaware)

  • Hou, Kewei

    (Ohio State U)

  • Taoushianis, Zenon

    (U of Southampton)

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.

Suggested Citation

  • Bao, Jack & Hou, Kewei & Taoushianis, Zenon, 2024. "Default Risk Shocks of Financial Institutions as a Systemic Risk Indicator," Working Paper Series 2024-16, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2024-16
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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions
    • G01 - Financial Economics - - General - - - Financial Crises
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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