📢 What This Paper Introduces
This paper introduces forward-looking measures of the network connectedness of fears in the financial system. The measures capture how "good" and "bad" beliefs about uncertainty—held by market participants—spread unequally across a network of banks, producing an asymmetric pattern of contagion.
📊 Measuring Fears From Bank Option Trades
- Uses traded call and put option prices of the main U.S. banks to extract network information.
- Separately constructs connectedness from calls and from puts to reflect market participants' positive and negative beliefs about future uncertainty.
- Builds forward-looking, asymmetric network measures that track how uncertainty propagates unevenly through banking networks.
📈 Key Findings
- The asymmetric network structure derived from option prices contains valuable predictive information for macroeconomic conditions.
- These measures also forecast broader economic uncertainty beyond what symmetric or aggregate indicators reveal.
- The asymmetric connectedness indicators can serve as practical tools for forward-looking systemic risk monitoring.
🔎 Why It Matters
- Offers a new, market-based early-warning approach to detect which banks or links are channels of rising fear.
- Enhances the ability to distinguish between benign and harmful spreads of uncertainty by separating "good" and "bad" beliefs.
- Provides policy-makers and analysts with richer, forward-looking signals to complement traditional systemic risk metrics.
