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The term structure of banking crisis risk in the United States: A market data based compound option approach

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

We use a compound option-based structural credit risk model to estimate banking crisis risk for the United States based on market data on bank stocks on a daily frequency. We contribute to the literature by providing separate information on short-term, long-term and total crisis risk instead of a single-maturity risk measure usually inferred by Merton-type models or barrier models. We estimate the model by applying the Duan (1994) maximum-likelihood approach. A strongly increasing total crisis risk estimated from early July 2007 onwards is driven mainly by short-term crisis risk. Banks that defaulted or were overtaken during the crisis have a considerably higher crisis risk (especially higher long-term risk) than banks that survived the crisis.

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 35 (2011)
Issue (Month): 4 (April)
Pages: 876-885

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Handle: RePEc:eee:jbfina:v:35:y:2011:i:4:p:876-885
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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