Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/99976 
Year of Publication: 
2013
Series/Report no.: 
BGPE Discussion Paper No. 143
Publisher: 
Friedrich-Alexander-Universität Erlangen-Nürnberg, Bavarian Graduate Program in Economics (BGPE), Nürnberg
Abstract: 
We derive multivariate risk neutral asset distributions for major US financial institutions (FIs) using option implied marginal risk neutral asset distributions (RNDs) and probabilities 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 financial distress measures based on default scenarios taking place in the financial 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 financial sector throughout the year 2008.
Subjects: 
Financial Distress
Conditional Probability of Default
Copulae
Option Prices
Entropy Principle
JEL: 
C14
C32
G01
G21
Document Type: 
Working Paper

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