Too-Systemic-to-Fail: What Option Markets Imply about Sector-Wide Government Guarantees
2016 ◽
Vol 106
(6)
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pp. 1278-1319
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We examine the pricing of financial crash insurance during the 2007–2009 financial crisis in US option markets, and we show that a large amount of aggregate tail risk is missing from the cost of financial sector crash insurance during the crisis. The difference in costs between out-of-the-money put options for individual banks and puts on the financial sector index increases four-fold from its precrisis 2003–2007 level. We provide evidence that a collective government guarantee for the financial sector lowers index put prices far more than those of individual banks and explains the increase in the basket-index put spread. (JEL E44, G01, G13, G21, G28, H81)
2015 ◽
Vol 23
(4)
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pp. 517-541
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2019 ◽
Vol 3
(02)
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pp. 397
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2017 ◽
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2019 ◽
Vol 38
(3)
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pp. 662-678
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2017 ◽
Vol 20
(1)
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