What volatility smiles tell us about Too Big to Fail Problem

UNIVERSITY OF TECHNOLOGY SYDNEY
Finance Department
Research Seminars in Finance

Topic: What can volatility smiles tell us about the Too Big to Fail problem?

Speaker: Diego Puente Moncayo, ANU

Abstract: This paper exploits the information content of option markets to offer insight into the too-Big-to-Fail (TBTF) problem for banks. Using option prices, I construct a forward- looking measure of bank exposure to significant price drops (i.e. tail-risk) and use this to examine cross-sectional differences between large banks (with at least $50B in as- sets) and smaller banks. I document a permanent increase in the average tail-risk of the U.S. banking industry following the Global Financial Crisis, except for banks above the $50B size threshold (systemically important financial institutions (SIFIs)). I provide evidence that the post-crisis difference in tail-risk for banks above and below the $50B threshold owes to the TBTF status of SIFIs that was reinforced by the Dodd-Frank Act.

Date: Thursday, 14 November 2019
Time: 12.00 – 1.00 p.m.
Venue: University of Technology, Sydney
              Building 8, Room 05.006, Dr Chau Chak Wing Building
              Dr Chau Chak Wing Building
              14 - 28 Ultimo Road, Ultimo

Co-ordinator: Claire Liu  (Ph: +61 2 9514 7748)

Enquiries: Mala Kapahi (Ph: +61 2 9514 7777)

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Acknowledgement of Country

UTS acknowledges the Gadigal people of the Eora Nation, the Boorooberongal people of the Dharug Nation, the Bidiagal people and the Gamaygal people, upon whose ancestral lands our university stands. We would also like to pay respect to the Elders both past and present, acknowledging them as the traditional custodians of knowledge for these lands.