September 2014

Bank Interventions and Options-based Systemic Risk: Evidence from the Global and Euro-area Crisis

Juan M. Londono and Mary Tian


Using a novel dataset on central bank interventions to financial institutions, we examine the impact of capital injection announcements on systemic risk for the banking sector in the U.S. and the euro area between 2008 and 2013. We propose a new measure of options-based systemic risk called downside correlation risk premium (DCRP), which quantifies the compensation investors demand for being exposed to the risk of large correlated drops in bank stock prices. DCRP is calculated using options that provide a hedge against large drops in the price of a bank index and its individual components. We find that, irrespective of their characteristics, intervention announcements significantly reduce DCRP in the U.S. while for the euro area, interventions were largely unsuccessful at reducing DCRP.

Keywords: Systemic Risk, Downside Correlation Risk Premium, Bank Interventions, Variance Risk Premium, European Banking Union

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Last Update: June 26, 2020