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Options on Interbank Rates and Implied Disaster Risk

Author

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  • Doshi, Hitesh
  • Kim, Hyung Joo
  • Seo, Sang Byung

Abstract

The identification of disaster risk has remained a significant challenge due to the rarity of macroeconomic disasters. We show that the interbank market can help characterize the time variation in disaster risk. We propose a risk-based model in which macroeconomic disasters are likely to coincide with interbank market failure. Using interbank rates and their options, we estimate our model via maximum likelihood estimation (MLE) and filter the short-run and long-run components of disaster risk. Our estimation results are independent of the stock market and serve as an external validity test of rare disaster models, which are typically calibrated to match stock moments.

Suggested Citation

  • Doshi, Hitesh & Kim, Hyung Joo & Seo, Sang Byung, 2026. "Options on Interbank Rates and Implied Disaster Risk," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 61(3), pages 1492-1527, May.
    • Handle: RePEc:cup:jfinqa:v:61:y:2026:i:3:p:1492-1527_14
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