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Currency Mismatches and Corporate Default Risk

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Author Info

  • Andre Santos
  • Jorge A. Chan-Lau

Abstract

Currency mismatches in corporate balance sheets have been singled out as an important factor underlying the severity of recent financial crises. We propose several structural models for measuring default risk for firms with currency mismatches in their asset/liability structure. The proposed models can be adapted to different exchange rate regimes, are analytically tractable, and can be estimated using available equity price and balance sheet data. The paper provides a detailed explanation on how to calibrate the models and discusses two applications to financial surveillance: the measurement of systematic risk in the corporate sector and the estimation of prudential leverage ratios consistent with regulatory capital ratios in the banking sector.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/269.

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Length: 30
Date of creation: 01 Dec 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/269

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Related research

Keywords: Dollarization; Corporate sector; Credit risk; Economic models; probability; equation; diffusion model; bond; calibration; diffusion process; diffusion processes; coupon bond; equations; time series; probabilities; bonds; normal distribution; correlation; currency mismatch; random variable; stochastic differential equations; poisson process; financial stability; bondholders; denominated bonds; bond markets; coupon bonds; international finance; normal density; cash flow; probability distribution; maximum likelihood estimation; financial institutions; probability distributions; hedges; stochastic differential equation; algebra; interest rate risk; samurai bond; stochastic process; calculus; financial systems; international financial markets; zero-coupon bonds; parameter vector; estimation procedure; currency crisis; computation; equity markets; maximum likelihood methods; financial fragility; probability density; eurobond; sampling; financial markets; random variables; stock returns; default-free bond; exponential distribution; bond indenture; mathematics; forecasting; stock markets;

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References

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  1. Amadou N. R. Sy & Jorge A. Chan-Lau, 2006. "Distance-To-Default in Banking," IMF Working Papers 06/215, International Monetary Fund.
  2. Andrew W. Lo, 1986. "Maximum Likelihood Estimation of Generalized Ito Processes with Discretely Sampled Data," NBER Technical Working Papers 0059, National Bureau of Economic Research, Inc.
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  7. Guillermo Calvo & Alejandro Izquierdo & Luis-Fernando Mejía, 2004. "On the empirics of Sudden Stops: the relevance of balance-sheet effects," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
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  13. Arnaud Jobert & Janet Kong & Jorge A. Chan-Lau, 2004. "An Option-Based Approach to Bank Vulnerabilities in Emerging Markets," IMF Working Papers 04/33, International Monetary Fund.
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  19. Bates, David S, 1996. "Jumps and Stochastic Volatility: Exchange Rate Processes Implicit in Deutsche Mark Options," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 69-107.
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Citations

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Cited by:
  1. Dan Galai & Zvi Wiener, 2012. "Credit Risk Spreads in Local and Foreign Currencies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(5), pages 883-901, 08.
  2. Jose Giancarlo Gasha & Andre Santos & Jorge A. Chan-Lau & Carlos I. Medeiros & Marcos Souto & Christian Capuano, 2009. "Recent Advances in Credit Risk Modeling," IMF Working Papers 09/162, International Monetary Fund.
  3. Stacia Howard, 2009. "Stress testing with incomplete data: a practical guide," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Proceedings of the IFC Conference on "Measuring financial innovation and its impact", Basel, 26-27 August 2008, volume 31, pages 344-355 Bank for International Settlements.

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