Liquidity, leverage, and Lehman: A structural analysis of financial institutions in crisis

Ren-Raw Chen, N.K. Chidambaran, Michael B. Imerman and Ben J. Sopranzetti

Journal of Banking & Finance, 2014, vol. 45, issue C, 117-139

Abstract: This paper presents a flexible, lattice-based structural credit risk model that uses equity market information and a detailed depiction of a financial institution’s liability structure to analyze default risk. The model is applied to examine the term structure of default probabilities for Lehman Brothers prior to its demise. The results indicate, as early as March, that the firm would likely lose access to external capital within two years. The model can be used as both a diagnostic tool for the early detection of financial distress and a prescriptive tool for addressing the sources of risk in large, complex financial institutions.

Keywords: Structural credit risk models; Financial crisis; Risk management; Lehman Brothers; Default probability; Liquidity (search for similar items in EconPapers)
JEL-codes: G G01 G02 G12 G21 G24 G28 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:45:y:2014:i:c:p:117-139

DOI: 10.1016/j.jbankfin.2014.04.018

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