IDEAS home Printed from https://ideas.repec.org/p/fip/fedgif/1117.html
   My bibliography  Save this paper

Bank Interventions and Options-based Systemic Risk: Evidence from the Global and Euro-area Crisis

Author

Abstract

Using a novel dataset on central bank interventions to financial institutions, we examine the impact of capital injection announcements on systemic risk for the banking sector in the U.S. and the euro area between 2008 and 2013. We propose a new measure of options-based systemic risk called downside correlation risk premium (DCRP), which quantifies the compensation investors demand for being exposed to the risk of large correlated drops in bank stock prices. DCRP is calculated using options that provide a hedge against large drops in the price of a bank index and its individual components. We find that, irrespective of their characteristics, intervention announcements significantly reduce DCRP in the U.S. while for the euro area, interventions were largely unsuccessful at reducing DCRP.

Suggested Citation

  • Juan M. Londono & Mary Tian, 2014. "Bank Interventions and Options-based Systemic Risk: Evidence from the Global and Euro-area Crisis," International Finance Discussion Papers 1117, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:1117
    as

    Download full text from publisher

    File URL: http://www.federalreserve.gov/econresdata/ifdp/2014/files/ifdp1117.pdf
    File Function: Full text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Mark Britten‐Jones & Anthony Neuberger, 2000. "Option Prices, Implied Price Processes, and Stochastic Volatility," Journal of Finance, American Finance Association, vol. 55(2), pages 839-866, April.
    2. Mr. Luc Laeven & Mr. Fabian Valencia, 2010. "Resolution of Banking Crises: The Good, the Bad, and the Ugly," IMF Working Papers 2010/146, International Monetary Fund.
    3. Tim Bollerslev & George Tauchen & Hao Zhou, 2009. "Expected Stock Returns and Variance Risk Premia," The Review of Financial Studies, Society for Financial Studies, vol. 22(11), pages 4463-4492, November.
    4. Viral V. Acharya & Lasse H. Pedersen & Thomas Philippon & Matthew Richardson, 2017. "Measuring Systemic Risk," The Review of Financial Studies, Society for Financial Studies, vol. 30(1), pages 2-47.
    5. Bollerslev, Tim & Gibson, Michael & Zhou, Hao, 2011. "Dynamic estimation of volatility risk premia and investor risk aversion from option-implied and realized volatilities," Journal of Econometrics, Elsevier, vol. 160(1), pages 235-245, January.
    6. De Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic risk: A survey," Working Paper Series 35, European Central Bank.
    7. Geert Bekaert & Eric Engstrom, 2009. "Asset Return Dynamics under Bad Environment Good Environment Fundamentals," NBER Working Papers 15222, National Bureau of Economic Research, Inc.
    8. Xin Huang & Hao Zhou & Haibin Zhu, 2012. "Systemic Risk Contributions," Journal of Financial Services Research, Springer;Western Finance Association, vol. 42(1), pages 55-83, October.
    9. Viktor Todorov, 2010. "Variance Risk-Premium Dynamics: The Role of Jumps," The Review of Financial Studies, Society for Financial Studies, vol. 23(1), pages 345-383, January.
    10. Aruoba, S. BoraÄŸan & Diebold, Francis X. & Scotti, Chiara, 2009. "Real-Time Measurement of Business Conditions," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(4), pages 417-427.
    11. Brei, Michael & Gambacorta, Leonardo & von Peter, Goetz, 2013. "Rescue packages and bank lending," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 490-505.
    12. Huang, Xin & Zhou, Hao & Zhu, Haibin, 2009. "A framework for assessing the systemic risk of major financial institutions," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2036-2049, November.
    13. Bryan Kelly & Hanno Lustig & Stijn Van Nieuwerburgh, 2016. "Too-Systemic-to-Fail: What Option Markets Imply about Sector-Wide Government Guarantees," American Economic Review, American Economic Association, vol. 106(6), pages 1278-1319, June.
    14. Adam Posen & Nicolas Véron, 2009. "A solution for Europe's banking problem," Policy Briefs 310, Bruegel.
    15. Scotti, Chiara, 2016. "Surprise and uncertainty indexes: Real-time aggregation of real-activity macro-surprises," Journal of Monetary Economics, Elsevier, vol. 82(C), pages 1-19.
    16. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    17. Xavier Gabaix, 2012. "Variable Rare Disasters: An Exactly Solved Framework for Ten Puzzles in Macro-Finance," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(2), pages 645-700.
    18. Dimitrios Bisias & Mark Flood & Andrew W. Lo & Stavros Valavanis, 2012. "A Survey of Systemic Risk Analytics," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 255-296, October.
    19. Jin-Chuan Duan & Jason Wei, 2009. "Systematic Risk and the Price Structure of Individual Equity Options," The Review of Financial Studies, Society for Financial Studies, vol. 22(5), pages 1981-2006, May.
    20. repec:fip:fedhpr:y:2010:i:may:p:65-71 is not listed on IDEAS
    21. Gurdip Bakshi & Dilip Madan, 2006. "A Theory of Volatility Spreads," Management Science, INFORMS, vol. 52(12), pages 1945-1956, December.
    22. Ziegler, Alexandre & Schürhoff, Norman, 2011. "Variance risk, financial intermediation, and the cross-section of expected option returns," CEPR Discussion Papers 8268, C.E.P.R. Discussion Papers.
    23. Joost Driessen & Pascal J. Maenhout & Grigory Vilkov, 2009. "The Price of Correlation Risk: Evidence from Equity Options," Journal of Finance, American Finance Association, vol. 64(3), pages 1377-1406, June.
    24. George J. Jiang & Yisong S. Tian, 2005. "The Model-Free Implied Volatility and Its Information Content," The Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1305-1342.
    25. Juan M. Londono, 2011. "The variance risk premium around the world," International Finance Discussion Papers 1035, Board of Governors of the Federal Reserve System (U.S.).
    26. Peter Carr & Liuren Wu, 2009. "Variance Risk Premiums," The Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1311-1341, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Aida Barkauskaite & Ausrine Lakstutiene & Justyna Witkowska, 2018. "Measurement of Systemic Risk in a Common European Union Risk-Based Deposit Insurance System: Formal Necessity or Value-Adding Process?," Risks, MDPI, vol. 6(4), pages 1-21, December.
    2. Andrieș, Alin Marius & Nistor, Simona & Ongena, Steven & Sprincean, Nicu, 2020. "On Becoming an O-SII (“Other Systemically Important Institution”)," Journal of Banking & Finance, Elsevier, vol. 111(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Juan M. Londono, 2011. "The variance risk premium around the world," International Finance Discussion Papers 1035, Board of Governors of the Federal Reserve System (U.S.).
    2. Konstantinidi, Eirini & Skiadopoulos, George, 2016. "How does the market variance risk premium vary over time? Evidence from S&P 500 variance swap investment returns," Journal of Banking & Finance, Elsevier, vol. 62(C), pages 62-75.
    3. Konstantinidi, Eirini & Skiadopoulos, George, 2016. "How does the market variance risk premium vary over time? Evidence from S&P 500 variance swap investment returns," Journal of Banking & Finance, Elsevier, vol. 62(C), pages 62-75.
    4. Maneesoonthorn, Worapree & Martin, Gael M. & Forbes, Catherine S. & Grose, Simone D., 2012. "Probabilistic forecasts of volatility and its risk premia," Journal of Econometrics, Elsevier, vol. 171(2), pages 217-236.
    5. Hollstein, Fabian & Wese Simen, Chardin, 2020. "Variance risk: A bird’s eye view," Journal of Econometrics, Elsevier, vol. 215(2), pages 517-535.
    6. Philippe Mueller & Andrea Vedolin & Yu-min Yen, 2012. "Bond Variance Risk Premia," FMG Discussion Papers dp699, Financial Markets Group.
    7. Sankar, Ganesh & Ramachandran, Shankar & Lukose P J, Jijo, 2020. "Dynamics of variance risk premium: Evidence from India," International Review of Economics & Finance, Elsevier, vol. 70(C), pages 321-334.
    8. González-Urteaga, Ana & Rubio, Gonzalo, 2016. "The cross-sectional variation of volatility risk premia," Journal of Financial Economics, Elsevier, vol. 119(2), pages 353-370.
    9. Della Corte, Pasquale & Sarno, Lucio & Tsiakas, Ilias, 2011. "Spot and forward volatility in foreign exchange," Journal of Financial Economics, Elsevier, vol. 100(3), pages 496-513, June.
    10. Huang, Huichou & MacDonald, Ronald & Zhao, Yang, 2012. "Global Currency Misalignments, Crash Sensitivity, and Downside Insurance Costs," MPRA Paper 53745, University Library of Munich, Germany, revised 18 Nov 2013.
    11. Barras, Laurent & Malkhozov, Aytek, 2016. "Does variance risk have two prices? Evidence from the equity and option markets," Journal of Financial Economics, Elsevier, vol. 121(1), pages 79-92.
    12. Turan G. Bali & Hao Zhou, 2011. "Risk, uncertainty, and expected returns," Finance and Economics Discussion Series 2011-45, Board of Governors of the Federal Reserve System (U.S.).
    13. Masato Ubukata & Toshiaki Watanabe, 2011. "Market Variance Risk Premiums in Japan as Predictor Variables and Indicators of Risk Aversion," Global COE Hi-Stat Discussion Paper Series gd11-214, Institute of Economic Research, Hitotsubashi University.
    14. Bekaert, Geert & Hoerova, Marie, 2014. "The VIX, the variance premium and stock market volatility," Journal of Econometrics, Elsevier, vol. 183(2), pages 181-192.
    15. DeMiguel, Victor & Plyakha, Yuliya & Uppal, Raman & Vilkov, Grigory, 2013. "Improving Portfolio Selection Using Option-Implied Volatility and Skewness," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 48(6), pages 1813-1845, December.
    16. Stanislav Khrapov, 2011. "Pricing Central Tendency in Volatility," Working Papers w0168, New Economic School (NES).
    17. Erik Vogt, 2014. "Option-implied term structures," Staff Reports 706, Federal Reserve Bank of New York.
    18. Laurent Barras & Aytek Malkhozov, 2015. "Does variance risk have two prices? Evidence from the equity and option markets," BIS Working Papers 521, Bank for International Settlements.
    19. Arash, Aloosh, 2011. "Variance Risk Premium Differentials and Foreign Exchange Returns," MPRA Paper 40829, University Library of Munich, Germany, revised 18 Aug 2012.
    20. Philippe Mueller & Andrea Vedolin & Hao Zhou, 2019. "Short-Run Bond Risk Premia," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 9(03), pages 1-34, September.

    More about this item

    Keywords

    Systemic Risk; Downside Correlation Risk Premium; Bank Interventions; Variance Risk Premium; European Banking Union;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedgif:1117. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ryan Wolfslayer ; Keisha Fournillier (email available below). General contact details of provider: https://edirc.repec.org/data/frbgvus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.