Market-Based Estimation of Default Probabilities and its Application to Financial Market Surveillance

Jorge Chan-Lau

No 2006/104, IMF Working Papers from International Monetary Fund

Abstract: This paper reviews a number of different techniques for estimating default probabilities from the prices of publicly traded securities. These techniques are useful for assessing credit exposure, systemic risk, and stress testing financial systems. The choice of techniques was guided by their ease of implementation and their applicability to a wide cross-section of countries and markets. Simple one-period cases are studied to sharpen the reader's intuition, and the usefulness of each technique for enhancing financial surveillance is illustrated with real applications.

Keywords: WP; asset swap; value; default probability; financial system; security prices; systemic risk; financial surveillance; CDS contract; CDS market; CDS spread; equity price volatility; credit derivatives securities; Credit default swap; Bonds; Asset prices; Stocks; Asset valuation; Global; East Asia; Europe; Asia and Pacific (search for similar items in EconPapers)
Pages: 19
Date: 2006-04-01
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Citations: View citations in EconPapers (22)

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