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Extracting Leading Indicators of Bank Fragility from Market Prices - Estonia Focus

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Author Info
Yu-Fu Chen
Michael Funke
Kadri Männasoo

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Abstract

Banking reform has proved to be one of the most problematic elements of economic transition in central and eastern Europe. Therefore the paper considers the development of the Estonian banking sector and derives individual banks´ fragility scores during transition. To this end we use option-based tools and equity prices to estimate distance-to-default measures of banks´ distress probabilities. Overall, the results suggest that market indicators are moderately useful for anticipating future financial distress and rating changes in transition economies. The implication for an effective supervisory framework is to use a plurality of risk scores when assessing bank vulnerability.

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File URL: http://www.dundee.ac.uk/econman/discussion/DDPE_185.pdf
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Publisher Info
Paper provided by University of Dundee, Economic Studies in its series Discussion Papers with number 185.

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Length: 25 pages
Date of creation: Dec 2005
Date of revision:
Handle: RePEc:dun:dpaper:185

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Related research
Keywords: Banking; Financial Stability; Bank Fragility; Options; Estonia;

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Find related papers by JEL classification:
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

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