An Option-Based Approach to Bank Vulnerabilities in Emerging Markets

Author/Editor:

Arnaud Jobert ; Janet Kong ; Jorge A Chan-Lau

Publication Date:

February 1, 2004

Electronic Access:

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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 measure bank vulnerability in emerging markets using the distance-to-default, a risk-neutral indicator based on Merton's (1974) structural model of credit risk. The indicator is estimated using equity prices and balance-sheet data for 38 banks in 14 emerging market countries. Results show it can predict a bank's credit deterioration up to nine months in advance. The distance-to-default, hence, may prove useful for bank monitoring purposes.

Series:

Working Paper No. 04/33

Subject:

English

Publication Date:

February 1, 2004

ISBN/ISSN:

9781451845211/1018-5941

Stock No:

WPIEA0332004

Format:

Paper

Pages:

22

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