The term structure of banking crisis risk in the United States: A market data based compound option approach
AbstractWe use a compound option-based structural credit risk model to estimate banking crisis risk for the United States based on market data on bank stocks on a daily frequency. We contribute to the literature by providing separate information on short-term, long-term and total crisis risk instead of a single-maturity risk measure usually inferred by Merton-type models or barrier models. We estimate the model by applying the Duan (1994) maximum-likelihood approach. A strongly increasing total crisis risk estimated from early July 2007 onwards is driven mainly by short-term crisis risk. Banks that defaulted or were overtaken during the crisis have a considerably higher crisis risk (especially higher long-term risk) than banks that survived the crisis.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Banking & Finance.
Volume (Year): 35 (2011)
Issue (Month): 4 (April)
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Web page: http://www.elsevier.com/locate/jbf
Banking crisis Bank default Option pricing theory Compound option Liability structure;
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