Working Papers in full text
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
All
Other researchrelated activities and publications of the IMF can be found at IMF Research

Free Email Notification
Receive emails when we post new
items of interest to you.
Subscribe or
Modify your profile




Probabilities of Default and the Market Price of Risk in a Distressed Economy
Author/Editor: 
Miguel A. Segoviano Basurto  Raphael A. Espinoza 
Authorized for Distribution: 
April 1, 2011 
Electronic Access: 
Free Full Text (PDF file size is 1,144KB)
Use the free Adobe Acrobat Reader to view this PDF file.


Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.


Summary: We propose an original method to estimate the market price of risk under stress, which is needed to correct for risk aversion the CDSimplied probabilities of distress. The method is based, for simplicity, on a onefactor asset pricing model. The market price of risk under stress (the expectation of the market price of risk, conditional on it exceeding a certain threshold) is computed from the price of risk (which is the variance of the market price of risk) and the discount factor (which is the inverse of the expected market price of risk). The threshold is endogenously determined so that the probability of the price of risk exceeding it is also the probability of distress of the asset. The price of risk can be estimated via different methods, for instance derived from the VIX or from the factors in a FamaMacBeth regression.


Order a print copy

Series: 
Working Paper No. 11/75 
Subject(s): 
Bankruptcy  Banks  Credit risk  Economic models  Risk premium 
Author's keyword(s): 
Price of risk; credit default swap; CDS; riskneutral probability




Published: 

April 1, 2011 





ISBN/ISSN: 

9781455227044/10185941 

Format: 

Paper 

Stock No: 

WPIEA2011075 

Pages: 

14 

Price: 

US$18.00






