An Option-Based Approach to Bank Vulnerabilities in Emerging Markets

Author: Arnaud Jobert, Ms. Janet Kong, and Mr. Jorge A Chan-Lau

Volume/Issue: Volume 2004 Issue 033

Publication date: February 2004

ISBN: 9781451845211

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Topics covered in this book

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

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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.