Predicting Systemic Risk with Entropic Indicators
This paper concentrates on quantifying the behavioral aspects of systemic risk by using a novel approach based on entropy. More specifically, we study aggregate market expectations and the predictability of the systemic risk before and during the financial crisis in 2008. Two underlying signals for estimating entropic risk measures are considered: 1) skewness premium of deepest out-of-the-money options, and 2) implied volatility ratio in regards to deepest out-of-the-money options. The findings confirm the predictive and contemporaneous usefulness of our entropy setting in market risk management. The degree of predictability is closely linked to both the type of entropy and the nature of the underlying signal.
|Date of creation:||Mar 2015|
|Contact details of provider:|| Postal: Via Patara, 3, 47921 Rimini (RN)|
Web page: http://www.rcfea.org
More information through EDIRC
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.:
- Lisa Borland, 2002. "A theory of non-Gaussian option pricing," Quantitative Finance, Taylor & Francis Journals, vol. 2(6), pages 415-431.
- Scholes, Myron S, 1996. "Global Financial Markets, Derivative Securities, and Systemic Risks," Journal of Risk and Uncertainty, Springer, vol. 12(2-3), pages 271-286, May.
- Gamero, L.G. & Plastino, A. & Torres, M.E., 1997. "Wavelet analysis and nonlinear dynamics in a nonextensive setting," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 246(3), pages 487-509.
- Gençay, Ramazan & Gradojevic, Nikola, 2010.
"Crash of '87 -- Was it expected?: Aggregate market fears and long-range dependence,"
Journal of Empirical Finance,
Elsevier, vol. 17(2), pages 270-282, March.
- Ramazan Gencay & Nikola Gradojevic, 2009. "Crash of ’87 - Was it Expected? Aggregate Market Fears and Long Range Dependence," Working Paper Series 28_09, The Rimini Centre for Economic Analysis.
- Gradojevic, Nikola & Gencay, Ramazan, 2008. "Overnight interest rates and aggregate market expectations," Economics Letters, Elsevier, vol. 100(1), pages 27-30, July.
- Nikola Gradojevic & Ramazan Gençay, 2009. "Overnight Interest Rates and Aggregate Market Expectations," Working Paper Series 26_09, The Rimini Centre for Economic Analysis.
- Martin, M.T. & Plastino, A.R. & Plastino, A., 2000. "Tsallis-like information measures and the analysis of complex signals," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 275(1), pages 262-271.
- Kitamura, Yuichi & Stutzer, Michael, 2002. "Connections between entropic and linear projections in asset pricing estimation," Journal of Econometrics, Elsevier, vol. 107(1-2), pages 159-174, March.
- Kaynar, Bahar & Ridder, Ad, 2010. "The cross-entropy method with patching for rare-event simulation of large Markov chains," European Journal of Operational Research, Elsevier, vol. 207(3), pages 1380-1397, December.
- Tong, S. & Bezerianos, A. & Paul, J. & Zhu, Y. & Thakor, N., 2002. "Nonextensive entropy measure of EEG following brain injury from cardiac arrest," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 305(3), pages 619-628.
- Yang, Jiping & Qiu, Wanhua, 2005. "A measure of risk and a decision-making model based on expected utility and entropy," European Journal of Operational Research, Elsevier, vol. 164(3), pages 792-799, August. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:rim:rimwps:15-14. 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: (Marco Savioli)
If references are entirely missing, you can add them using this form.