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Market Evaluations of Banking Fragility in Japan: Japan Premium, Stock Prices, and Credit Derivatives

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Author Info
Takatoshi Ito
Kimie Harada

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Abstract

This paper investigates movements of market indicators of banking fragility, namely, Japan premium, stock prices, and credit derivative spreads of Japanese banks. Although the Japan premium in the euro-dollar market seemed to have virtually disappeared since April 1999, credit and default risks of Japanese banks has not necessarily disappeared. Other indicators show varying degrees of fragility among Japanese banks in 1998-2001. Banking stock prices continue to slide compared to the market-wide stock price index. From pricing of credit derivatives, default probabilitie of banks can be etracted. Correlations among indicators were high both in the first period and in the second period; Credit default swap (CDS) premium explains Japan premium with a significant, positive coefficient. The higher the CDS is, lower go the stock prices. Before the capital injection of 1999, the markets were more sensitive to bank vulnerability and higher premiums were required

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9589.

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Date of creation: Mar 2003
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Handle: RePEc:nbr:nberwo:9589

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G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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