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The systemic risk approach based on implied and realized volatility

Author

Listed:
  • Paweł Sakowski

    (University of Warsaw, Faculty of Economic Sciences, Department of Quantitative Finance, Quantitative Finance Research Group)

  • Rafał Sieradzki

    (New York University Stern School of Business; Cracow University of Economics)

  • Robert Ślepaczuk

    (University of Warsaw, Faculty of Economic Sciences, Department of Quantitative Finance, Quantitative Finance Research Group)

Abstract

We propose a new measure of systemic risk to analyze the impact of the major financial market turmoils in the stock markets from 2000 to 2021 in the USA, Europe, Brazil, and Japan. Our Implied Volatility Realized Volatility Systemic Risk Indicator (IVRVSRI) shows that the reaction of stock markets varies across different geographical locations and the persistence of the shocks depends on the historical volatility and long-term average volatility level in a given market. The methodology applied is based on the logic “the simpler is always better than the more complex, if it leads to the same results”. Such an approach significantly limits the model risk and substantially decreases computational burden. Robustness checks show that IVRVSRI is a precise measure of the current systemic risk in the stock markets. Moreover, IVRVSRI seems to be a valid indication of current systemic risk in equity markets and it can be used for other types of assets and high-frequency data.

Suggested Citation

  • Paweł Sakowski & Rafał Sieradzki & Robert Ślepaczuk, 2023. "The systemic risk approach based on implied and realized volatility," Working Papers 2023-07, Faculty of Economic Sciences, University of Warsaw.
    • Handle: RePEc:war:wpaper:2023-07
    as

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    File URL: https://www.wne.uw.edu.pl/download_file/2577/0
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    systemic risk; implied volatility; realized volatility; volatility indices; equity index options; market volatility;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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