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Using the Arbitrage Pricing Theory to Calculate the Probability of Financial Institution Failure: A Note

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  • Clare, Andrew D

Abstract

Where regulation is deemed desirable by authorities and where a risk based approach is preferred, how do regulators assess the riskiness inherent in a financial institution's balance sheet? A market measure of the probability of financial institution failure is developed in this paper. This measure incorporates the arbitrage pricing theory of Stephen A. Ross (1976), thus allowing for the inclusion of systematic sources of risk. Copyright 1995 by Ohio State University Press.

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  • Clare, Andrew D, 1995. "Using the Arbitrage Pricing Theory to Calculate the Probability of Financial Institution Failure: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 920-926, August.
    • Handle: RePEc:mcb:jmoncb:v:27:y:1995:i:3:p:920-26
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    Cited by:

    1. José Filipe Abreu & Mohamed Azzim Gulamhussen, 2015. "The Effectiveness of Regulatory Capital Requirements Prior to the Onset of the Financial Crisis," International Review of Finance, International Review of Finance Ltd., vol. 15(2), pages 199-221, June.
    2. Tabak, Benjamin M. & Luduvice, André Victor D. & Cajueiro, Daniel O., 2011. "Modeling default probabilities: The case of Brazil," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(4), pages 513-534, October.
    3. Azusa Takeyama & Nick Constantinou & Dmitri Vinogradov, 2012. "A Framework for Extracting the Probability of Default from Stock Option Prices," IMES Discussion Paper Series 12-E-14, Institute for Monetary and Economic Studies, Bank of Japan.
    4. Tabak, Benjamin M. & Staub, Roberta B., 2007. "Assessing financial instability: The case of Brazil," Research in International Business and Finance, Elsevier, vol. 21(2), pages 188-202, June.
    5. Abreu, José Filipe & Gulamhussen, Mohamed Azzim, 2013. "The stock market reaction to the public announcement of a supranational list of too-big-to-fail banks during the financial crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 25(C), pages 49-72.
    6. firano, zakaria, 2011. "Probability of default using APT model: Case of Moroccan banking system," MPRA Paper 95342, University Library of Munich, Germany.

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