Option Implied Measures of Systemic Risk in the US Financial Sector: Operator and Quadrature Measures of Extreme Events
43 Pages Posted: 15 Dec 2016 Last revised: 2 May 2017
Date Written: May 2, 2017
Eigenfunction and quadrature methods have been extensively used in asset pricing as a forecasting tool. In contrast, their application to systemic risk has been limited. With the advent of high frequency options panels we document a battery of measures that can be used to measure and forecast systemic risk, these include computationally intensive dependency measures such as cubic and quartic average implied correlations. We then demonstrate, using the cross section of all US banks in Compustat, that our forward-looking, option-market based measures, are effective used in augmenting the forecasting component of a standard bank stress-testing model.
Keywords: Systemic Risk, Correlation Risk, CLASS Model, Contingent Pricing
JEL Classification: C23, C53, G17, G20, G13
Suggested Citation: Suggested Citation