IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Multivariate dependence of implied volatilities from equity options as measure of systemic risk

  • Jobst, Andreas A.

This paper presents a methodology to examine the multivariate tail dependence of the implied volatility of equity options as an early warning indicator of systemic risk within the financial sector. Using non-parametric methods of estimating changes in the dependence structure in response to common shocks affecting individual risk profiles, possible linkages during periods of stress are quantifiable while recognizing that large shocks are transmitted across financial markets differently than small shocks. Before and during the initial phase of the financial crisis, we find that systemic risk increased globally as early as February 2007 — months before the unraveling of the U.S. subprime mortgage crisis and long before the collapse of Lehman Brothers. The average (multivariate) dependence among a global sample of banks and insurance companies increased by almost 30% while joint tail risk declined by about the same order of magnitude, indicating that co-movements of large changes in equity volatility were more likely to occur and responses to extreme shocks became more differentiated as distress escalated. The key policy consideration flowing from our analysis is that complementary measures of joint tail risk at high data frequency are essential to the robust measurement of systemic risk, which could enhance market-based early warning mechanisms as part of macroprudential surveillance.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.sciencedirect.com/science/article/pii/S1057521913000069
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal International Review of Financial Analysis.

Volume (Year): 28 (2013)
Issue (Month): C ()
Pages: 112-129

as
in new window

Handle: RePEc:eee:finana:v:28:y:2013:i:c:p:112-129
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620166

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. International Monetary Fund, 2011. "Germany; Technical Note on Stress Testing," IMF Staff Country Reports 11/371, International Monetary Fund.
  2. Marco A. Espinosa-Vega & Juan Solé, 2011. "Cross-border financial surveillance: a network perspective," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 3(3), pages 182-205, August.
  3. Andreas Jobst, 2012. "Measuring Systemic Risk-Adjusted Liquidity (SRL); A Model Approach," IMF Working Papers 12/209, International Monetary Fund.
  4. Viral V. Acharya, 2010. "Measuring systemic risk," Proceedings 1140, Federal Reserve Bank of Chicago.
  5. Allen, Franklin & Babus, Ana & Carletti, Elena, 2010. "Financial Connections and Systemic Risk," Working Papers 10-20, University of Pennsylvania, Wharton School, Weiss Center.
  6. Acharya, Viral V & Pedersen, Lasse H & Philippon, Thomas & Richardson, Matthew P, 2012. "Measuring Systemic Risk," CEPR Discussion Papers 8824, C.E.P.R. Discussion Papers.
  7. Yamai, Yasuhiro & Yoshiba, Toshinao, 2005. "Value-at-risk versus expected shortfall: A practical perspective," Journal of Banking & Finance, Elsevier, vol. 29(4), pages 997-1015, April.
  8. de Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic Risk: A Survey," CEPR Discussion Papers 2634, C.E.P.R. Discussion Papers.
  9. Huang, Xin & Zhou, Hao & Zhu, Haibin, 2012. "Assessing the systemic risk of a heterogeneous portfolio of banks during the recent financial crisis," Journal of Financial Stability, Elsevier, vol. 8(3), pages 193-205.
  10. repec:fip:fedhpr:y:2010:i:may:p:65-71 is not listed on IDEAS
  11. Xin Huang & Hao Zhou & Haibin Zhu, 2009. "A framework for assessing the systemic risk of major financial institutions," Finance and Economics Discussion Series 2009-37, Board of Governors of the Federal Reserve System (U.S.).
  12. Henri Theil, 1969. "On the use of Information Theory Concepts in the Analysis of Financial Statements," Management Science, INFORMS, vol. 15(9), pages 459-480, May.
  13. International Monetary Fund, 2012. "Spain; Financial System Stability Assessment," IMF Staff Country Reports 12/137, International Monetary Fund.
  14. International Monetary Fund, 2011. "United Kingdom; Stress Testing the Banking Sector Technical Note," IMF Staff Country Reports 11/227, International Monetary Fund.
  15. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-50, July.
  16. Claudio E. V. Borio, 2003. "Towards a macroprudential framework for financial supervision and regulation?," BIS Working Papers 128, Bank for International Settlements.
  17. Allen, F. & Babus, A. & Carletti, E., 2010. "Financial Connections and Systemic Risk," Discussion Paper 2010-88S, Tilburg University, Center for Economic Research.
  18. International Monetary Fund, 2011. "Sweden; Financial Sector Assessment Program Update: Technical Note on Contingent Claims Analysis Approach to Measure Risk and Stress Test the Swedish Banking Sector," IMF Staff Country Reports 11/286, International Monetary Fund.
  19. Monica Billio & Mila Getmansky & Andrew W. Lo & Loriana Pelizzon, 2010. "Econometric Measures of Systemic Risk in the Finance and Insurance Sectors," NBER Chapters, in: Market Institutions and Financial Market Risk National Bureau of Economic Research, Inc.
  20. Mico Loretan & William B. English, 2000. "Evaluating "correlation breakdowns" during periods of market volatility," International Finance Discussion Papers 658, Board of Governors of the Federal Reserve System (U.S.).
  21. 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.
  22. Jorge A. Chan-Lau, 2010. "Regulatory Capital Charges for too-Connected-To-Fail Institutions; A Practical Proposal," IMF Working Papers 10/98, International Monetary Fund.
  23. Viral Acharya & Robert Engle & Matthew Richardson, 2012. "Capital Shortfall: A New Approach to Ranking and Regulating Systemic Risks," American Economic Review, American Economic Association, vol. 102(3), pages 59-64, May.
  24. Buchen, Peter W. & Kelly, Michael, 1996. "The Maximum Entropy Distribution of an Asset Inferred from Option Prices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(01), pages 143-159, March.
  25. International Monetary Fund, 2010. "United States; Publication of Financial Sector Assessment Program Documentation: Technical Note on Stress Testing," IMF Staff Country Reports 10/244, International Monetary Fund.
  26. Andreas Jobst, 2007. "Operational Risk; The Sting is Still in the Tail But the Poison Dependson the Dose," IMF Working Papers 07/239, International Monetary Fund.
  27. Mathias Drehmann & Nikola Tarashev, 2011. "Systemic importance: some simple indicators," BIS Quarterly Review, Bank for International Settlements, March.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:finana:v:28:y:2013:i:c:p:112-129. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

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

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.