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An Option-Based Approach to Bank Vulnerabilities in Emerging Markets

Author

Listed:
  • Arnaud Jobert
  • Ms. Janet Kong
  • Mr. Jorge A Chan-Lau

Abstract

We measure bank vulnerability in emerging markets using the distance-to-default, a risk-neutral indicator based on Merton's (1974) structural model of credit risk. The indicator is estimated using equity prices and balance-sheet data for 38 banks in 14 emerging market countries. Results show it can predict a bank's credit deterioration up to nine months in advance. The distance-to-default, hence, may prove useful for bank monitoring purposes.

Suggested Citation

  • Arnaud Jobert & Ms. Janet Kong & Mr. Jorge A Chan-Lau, 2004. "An Option-Based Approach to Bank Vulnerabilities in Emerging Markets," IMF Working Papers 2004/033, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2004/033
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    References listed on IDEAS

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