Estimating Default Probabilities Using Stock Prices: The Swedish Banking Sector During the 1990s Banking Crisis

Hans Byström

No 92, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: The growing interest in management of credit risk and estimation of default probabilities has given rise to a range of more or less elaborate credit risk models. Hall and Miles (1990) suggests an approach of estimating failure probabilities based solely on stock market prices. The approach has the advantage of simplicity but relies on market efficiency to hold. In this paper we suggest an extension to the Hall and Miles (1990) model using extreme value theory and apply the extended model to the Swedish financial sector and to individual Swedish banks. The 15 year long sample in our study covers the period of the Swedish banking crisis of the early 1990s. We find a close correspondence between changes in the estimated probabilities of failure and the actual credit events occuring. Credit ratings from major credit rating agencies, on the other hand, are shown to react much less and much slower to credit quality changes.

Keywords: banking crisis; default; credit risk; extreme value theory (search for similar items in EconPapers)
JEL-codes: C32 G14 G21 G33 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2003-02-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Estimating Default Probabilities Using Stock Prices: The Swedish Banking Sector During the 1990s Banking Crisis (2003)
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