 Abstract:
The current global crisis offers a unique opportunity to investigate the leading properties of market indicators in an increasingly stressed environment and their usefulness from a banking supervision perspective. One pool of relevant information that has been overlooked so far in the empirical literature is the market for bank’s exchange-traded option contracts. In this paper, we first extract early-warning indicators from the prices of the most actively traded option contracts on financial firms’ equity. We then examine empirically their ability to predict financial distress by applying survival analysis techniques to a sample of large US financial firms. We find that market indicators extracted from option prices significantly affects the survival time of troubled financial firms and perform at least as well in predicting financial distress as other time-varying covariates typically included in bank failure models. Overall, both accounting information and option prices contain useful information of subsequent financial problems and, more importantly, the combination produce better forecasts in a high-stress financial world, full of doubts and uncertainties.
Authors:
POP, Adrian
; COFFINET, Jerome
; TIESSET, Muriel
JEL classification:
Financial crisis; Financial distress; Financial system oversight; Banking supervision; Early-warning signals; Options; Implied volatility; Survival analysis
Keywords:
G21 G28
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