Market Valuation and Risk Assessment of Indian Banks using Black -Scholes -Merton Model

Pankaj Sinha, Sakshi Sharma and Kriti Sondhi

MPRA Paper from University Library of Munich, Germany

Abstract: The most pernicious effect of the global financial crisis is that it triggers a sequence of unpleasant consequences for the banking sector and for the entire economy as a whole. The recent financial crisis has compelled regulators to focus on the necessity of resilience of banks towards risks and sudden financial shocks. The riskiness of banks assets and its equity are two important factors for valuation of banks. These risks can be incorporated in market valuation only through Black-Scholes-Merton Model. This paper uses Black-Scholes-Merton option valuation approach for calculation of the market value and volatility of bank’s assets for a random sample of 13 Public and 8 Private sector banks in India over the period from March 2003 to March 2012. Further, it calculates yearly Z-score for each bank, allowing for capital adequacy as per the Basel II and III norms, for the periods before and after 2008 financial crisis. The obtained Z-scores suggest that the Indian banks are far from default and the impact of global recession of 2008 on the banks solvency was insignificant. All the Indian banks have market value to enterprise value ratio typically in the range of 93 to 99 per cent, suggesting that market value of bank’s assets obtained from Black-Scholes-Merton is characteristically below its enterprise value since market value considers the riskiness of the equity and assets both. It is found that the volatility of banks assets is significantly different for public and private sector banks over the period of study. Investigation of NPA to Total Assets reveals that presently NPA levels of the public sector banks are increasing whereas it is declining for the private sector banks.

Keywords: Black-Scholes -Merton; Market value; Volatility; Z-score; Non-Performing Assets (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 G33 G38 (search for similar items in EconPapers)
Date: 2013-06-06
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/47442/1/MPRA_paper_47442.pdf original version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:47442

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().