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Deriving the term structure of banking crisis risk with a compound option approach: The case of Kazakhstan

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  • Eichler, Stefan
  • Karmann, Alexander
  • Maltritz, Dominik

Abstract

We use a compound option-based structural credit risk model to infer a term structure of banking crisis risk from market data on bank stocks in daily frequency. Considering debt service payments with different maturities this term structure assigns a separate estimator for short- and long-term default risk to each maturity. Applying the Duan (1994) maximum likelihood approach, we find for Kazakhstan that the overall crisis probability was mainly driven by short-term risk, which increased from 25% in March 2007 to 80% in December 2008. Concurrently, the long-term default risk increased from 20% to only 25% during the same period. --

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Bibliographic Info

Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 2: Banking and Financial Studies with number 2010,01.

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Date of creation: 2010
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Handle: RePEc:zbw:bubdp2:201001

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Keywords: Banking crisis; bank default; option pricing theory; compound option; liability structure;

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