An Option-Based Approach to Bank Vulnerabilities in Emerging Markets

ByArnaud Jobert, Janet Kong, Jorge A Chan-Lau

February 1, 2004

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.

Subject: Asset and liability management, Asset valuation, Banking, Commercial banks, Credit, Emerging and frontier financial markets, Financial institutions, Financial markets, Money, Stocks

Keywords: annual balance sheet data, Asset valuation, asset volatility, Banco de Bogota, bank, bank distress, bank vulnerability, banks, banks Used, Commercial banks, Credit, Distance-to-default, distress event, downgraded bank, East Asia, Emerging and frontier financial markets, emerging markets, Stocks, WP

Pages:
22
Volume:
2004
DOI:
https://doi.org/10.5089/9781451845211.001
Issue:
033
Series:
Working Paper No. 2004/033
Stock No:
WPIEA0332004
ISBN:
9781451845211
ISSN:
1018-5941

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