Market-Based Estimation of Default Probabilities and its Application to Financial Market Surveillance
IMF Working Papers, April 1, 2006
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- Market-Based Estimation of Default Probabilities and its Application to Financial Market Surveillance
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Bibliographic details
- Authors: Jorge A Chan-Lau
- Published: April 1, 2006
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451863642.001
Summary
- Reviews a number of different techniques for estimating default probabilities from the prices of publicly traded securities.
- Techniques are useful for assessing credit exposure, systemic risk, and stress testing financial systems.
- Choice of techniques guided by ease of implementation and applicability to a wide cross-section of countries and markets.
- Simple one-period cases are studied to sharpen reader's intuition.
- Usefulness of each technique for enhancing financial surveillance is illustrated with real applications.
Techniques and methodological focus
- Evaluation of multiple market-based approaches to infer default probabilities from publicly traded security prices.
- Emphasis on techniques that are:
- Easy to implement.
- Applicable across a wide cross-section of countries and markets.
- Didactic use of simple one-period cases to build intuition about the methods.
Applications for financial market surveillance
- Assessing credit exposure using market-implied default probabilities.
- Monitoring systemic risk via market-based indicators of default risk.
- Informing stress testing of financial systems with market-implied default metrics.
- Illustrations provided through real applications to demonstrate how each technique can enhance surveillance.
Key topics and keywords
- Subject: Asset and liability management, Asset prices, Asset valuation, Bonds, Credit default swap, Financial institutions, Money, Prices, Stocks
- Keywords: Asia and Pacific, Asset prices, asset swap, Asset valuation, Bonds, CDS contract, CDS market, CDS spread, Credit default swap, credit derivatives securities, default probability, East Asia, equity price volatility, Europe, financial surveillance, financial system, Global, security prices, Stocks, systemic risk, value, WP
Publication and document facts
- Author: Jorge A Chan-Lau
- Publication date: April 1, 2006
- Series: Working Paper No. 2006/104
- Issue: 104
- Volume: 2006
- Pages: 19
- DOI: https://doi.org/10.5089/9781451863642.001
- Stock No: WPIEA2006104
- ISBN: 9781451863642
- ISSN: 1018-5941
IMF Working Paper: "Market-Based Estimation of Default Probabilities and its Application to Financial Market Surveillance" by Jorge A Chan-Lau, April 1, 2006.