An Option-Based Approach to Bank Vulnerabilities in Emerging Markets

Arnaud Jobert, Janet Kong and Jorge Chan-Lau

No 2004/033, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: 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 (search for similar items in EconPapers)
Pages: 22
Date: 2004-02-01
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Citations: View citations in EconPapers (42)

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