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Predicting Systemic Risk with Entropic Indicators
Author(s) -
Gradojevic Nikola,
Caric Marko
Publication year - 2017
Publication title -
journal of forecasting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.543
H-Index - 59
eISSN - 1099-131X
pISSN - 0277-6693
DOI - 10.1002/for.2411
Subject(s) - predictability , systemic risk , economics , econometrics , volatility (finance) , skewness , risk management , financial crisis , actuarial science , financial economics , statistics , mathematics , finance , macroeconomics
This paper concentrates on quantifying the behavioral aspects of systemic risk by using a novel approach based on entropy. More specifically, we study aggregate market expectations and the predictability of systemic risk before and during the financial crisis in 2008. Two underlying signals for estimating entropic risk measures are considered: (i) skewness premium of deepest out‐of‐the‐money options; and (ii) implied volatility ratio in regard to deepest out‐of‐the‐money options. The findings confirm the predictive and contemporaneous usefulness of our entropy setting in market risk management. The degree of predictability is closely linked to both the type of entropy and the nature of the underlying signal. Copyright © 2016 John Wiley & Sons, Ltd.