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Options-based systemic risk, financial distress, and macroeconomic downturns

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  • Bevilacqua, Mattia
  • Tunaru, Radu
  • Vioto, Davide

Abstract

We extract an option-implied 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 systemic risk measures (SRMs). Our measure exhibits more timely early warning signals of main events around the global financial crisis than the main SRMs. SOVaR shows significant predictive power for macroeconomic downturns as well as future recessions up to one year ahead. Our results are robust to various specifications, breakdowns of financial sectors, and controlling for other main risk measures proposed in the literature.

Suggested Citation

  • Bevilacqua, Mattia & Tunaru, Radu & Vioto, Davide, 2023. "Options-based systemic risk, financial distress, and macroeconomic downturns," LSE Research Online Documents on Economics 119289, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:119289
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    File URL: http://eprints.lse.ac.uk/119289/
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    More about this item

    Keywords

    financial distress; financial stability; macro-finance; options prices; systemic risk;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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