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Options-based systemic risk, financial distress, and macroeconomic downturns

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  • Bevilacqua, Mattia
  • Tunaru, Radu
  • Vioto, Davide

Abstract

We extract an option-implied measure for systemic risk, the Systemic Options Value-at-Risk (SOVaR), from put option prices that can capture the buildup stage of systemic risk in the financial sector earlier than the standard systemic risk measures (SRMs). Our measure exhibits more timely early warning signals of main events around the global financial crisis than the main SRMs. SOVaR shows significant predictive power for macroeconomic downturns as well as future recessions up to one year ahead. Our results are robust to various specifications, breakdowns of financial sectors, and controlling for other main risk measures proposed in the literature.

Suggested Citation

  • Bevilacqua, Mattia & Tunaru, Radu & Vioto, Davide, 2023. "Options-based systemic risk, financial distress, and macroeconomic downturns," Journal of Financial Markets, Elsevier, vol. 65(C).
    • Handle: RePEc:eee:finmar:v:65:y:2023:i:c:s1386418123000320
    DOI: 10.1016/j.finmar.2023.100834
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    More about this item

    Keywords

    Systemic risk; Options prices; Financial distress; Macro-finance; Financial stability;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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