A Capital Adequacy Buffer Model
AbstractIn this paper, we develop a new capital adequacy buffer model (CABM) which is sensitive to dynamic economic circumstances. The model, which measures additional bank capital required to compensate for fluctuating credit risk, is a novel combination of the Merton structural model, which measures distance to default, and the timeless capital asset pricing model (CAPM) which measures additional returns to compensate for additional share price risk.
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Bibliographic InfoPaper provided by University of Canterbury, Department of Economics and Finance in its series Working Papers in Economics with number 13/35.
Length: 13 pages
Date of creation: 16 Oct 2013
Date of revision:
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Credit risk; Capital buffer; Distance to default; Conditional value at risk; Capital adequacy buffer model;
Other versions of this item:
- Allen, D.E. & Powell, R.J. & Singh, A.K., 2013. "A Capital Adequacy Buffer Model," Econometric Institute Research Papers EI 2013-32, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
- David E. Allen & Michael McAleer & Robert J. Powell & Abhay K. Singh, 2013. "A Capital Adequacy Buffer Model," Documentos del Instituto Complutense de AnÃ¡lisis EconÃ³mico 2013-33, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.
- G01 - Financial Economics - - General - - - Financial Crises
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-12-15 (All new papers)
- NEP-BAN-2013-12-15 (Banking)
- NEP-CFN-2013-12-15 (Corporate Finance)
- NEP-RMG-2013-12-15 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Merton, Robert C, 1974.
"On the Pricing of Corporate Debt: The Risk Structure of Interest Rates,"
Journal of Finance,
American Finance Association, vol. 29(2), pages 449-70, May.
- Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Maria Vassalou & Yuhang Xing, 2004. "Default Risk in Equity Returns," Journal of Finance, American Finance Association, vol. 59(2), pages 831-868, 04.
- Kretzschmar, Gavin & McNeil, Alexander J. & Kirchner, Axel, 2010. "Integrated models of capital adequacy - Why banks are undercapitalised," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 2838-2850, December.
- Sreedhar T. Bharath & Tyler Shumway, 2008. "Forecasting Default with the Merton Distance to Default Model," Review of Financial Studies, Society for Financial Studies, vol. 21(3), pages 1339-1369, May.
- Bucher, Monika & Dietrich, Diemo & Hauck, Achim, 2013. "Business cycles, bank credit and crises," Economics Letters, Elsevier, vol. 120(2), pages 229-231.
- William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
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