Working Paper: A new approach to modelling banks' equity volatility: Adding time-to-maturity jumps

Working Papers - August 2017 - No. 118

Authors Grinderslev, Oliver Juhler; Kristiansen, Kristian Loft
Subject Financial stability; Financial sector; Financial risks; Models
Type Working paper
Year 2017
Published 16 August 2017
Time-to-maturity is introduced alongside leverage and asset volatility to explain equity volatility. The time-to-maturity can be interpreted as investors' views on when the firm will be liquidated and thereby relates to their view on the funding and solvency situation of the bank. Results for large European banks indicate that changes to the perceived time-to-maturity can indeed partly explain changes in observed equity volatility.