Template-Type: ReDIF-Paper 1.0

Author-Name: Philipp Matros
Author-X-Name-First: Philipp 
Author-X-Name-Last: Matros

Author-Name: Johannes Vilsmeier
Author-X-Name-First: Johannes 
Author-X-Name-Last: Vilsmeier


Title: The Multivariate Option iPoD Framework - Assessing Systemic Financial Risk

Abstract: We derive multivariate risk neutral asset distributions for major US nancial institutions
(FIs) using option implied marginal risk neutral asset distributions (RNDs) and probabili-
ties of default (PoDs). The multivariate densities are estimated by combining the entropy
approach, dynamic copulas and rank correlations. Our density estimates exhibit information
about the conditional distributions of the individual FIs and we propose several nancial
distress measures based on default scenarios taking place in the nancial sector. Empirical
results around the period of the US sub-prime crisis show that the proposed risk measures
in a timely manner identify i) the most troubled FIs in the system, ii) the systemically most
important FIs, iii) the implicit bailout guarantees of some FIs and iv) a `too interconnected
to fail' problem in the US nancial sector throughout the year 2008.

Length:  41 pages
Creation-Date:  2013-10
File-URL: http://www.bgpe.de/texte/DP/143_MatrosVilsmeier.pdf
File-Format: Application/pdf
File-Function: First version, 2013
Number: 143
Classification-JEL: C14, C32, G01, G21
Keywords: Financial Distress, Conditional Probability of Default, Copulae, Option Prices, Entropy Principle
Handle: RePEc:bav:wpaper:143_MatrosVilsmeier