Systemic Risk Analysis using Forward-Looking Distance-to-Default Series
AbstractBased on Contingent Claims Analysis, this paper develops a method to monitor systemic risk in the European banking system. Aggregated Distance-to-Default series are generated using option prices information from systemically important banks and the STOXX Europe 600 Banks Index. These indicators provide methodological advantages in monitoring vulnerabilities in the banking system over time: 1) they capture interdependences and joint risk of distress in systemically important banks; 2) their forward-looking feature endow them with early signaling properties compared to traditional approaches in the literature and other market-based indicators; 3) they produce simultaneously smooth and informative long-term signals and quick and clear reaction to market distress and 4) they incorporate additional information through option prices about tail risk and correlation breaks, in line with recent findings in the literature.
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Bibliographic InfoPaper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w201216.
Date of creation: 2012
Date of revision:
Other versions of this item:
- Martin Saldías Zambrana, 2010. "Systemic risk analysis using forward-looking distance-to-default series," Working Paper 1005, Federal Reserve Bank of Cleveland.
- G01 - Financial Economics - - General - - - Financial Crises
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-01-12 (All new papers)
- NEP-BAN-2013-01-12 (Banking)
- NEP-RMG-2013-01-12 (Risk Management)
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