Deriving the term structure of banking crisis risk with a compound option approach: The case of Kazakhstan

Stefan Eichler, Alexander Karmann and Dominik Maltritz

No 2010,01, Discussion Paper Series 2: Banking and Financial Studies from Deutsche Bundesbank

Abstract: We use a compound option-based structural credit risk model to infer a term structure of banking crisis risk from market data on bank stocks in daily frequency. Considering debt service payments with different maturities this term structure assigns a separate estimator for short- and long-term default risk to each maturity. Applying the Duan (1994) maximum likelihood approach, we find for Kazakhstan that the overall crisis probability was mainly driven by short-term risk, which increased from 25% in March 2007 to 80% in December 2008. Concurrently, the long-term default risk increased from 20% to only 25% during the same period.

Keywords: Banking crisis; bank default; option pricing theory; compound option; liability structure (search for similar items in EconPapers)
JEL-codes: G12 G17 G18 G21 G32 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-ban and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdp2:201001

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