Download or read book Financial Sector Tail Risk and Real Economic Activity written by Michael Neumann and published by . This book was released on 2014 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper documents that option-implied tail risk in the U.S. financial sector predicts real economic activity. The predictability is found to be incremental to the information content in a stock price-based measure of financial sector tail risk. This finding holds both in- and out-of-sample and is not driven by the 2007 to 2009 sub-prime crisis. The predictability can instead be attributed to the option market's ability to anticipate a rising funding cost differential between small and large banks which has a detrimental effect on real economic activity. The results have implications for the real-time monitoring of financial sector tail risk.