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How to gauge the credit risk of guarantee issues in a Taiwanese bills finance company: an empirical investigation using a market-based approach

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  • Su-Lien Lu
  • Chau-Jung Kuo

Abstract

This paper presents a formal methodology, using a market-based risk neutral approach, to gauge the credit risk of guarantee issues in a Taiwanese bills finance company. In particular, the probability of default is endogenously determined. Evidence shows that the recovery rate plays an important role in credit risk of a bills finance company's guarantee issues. On the other hand, credit risk is also correlated with different industries and business cycles, and care must be taken to consider these factors. Faced with the implementation of the Basel Capital Accord, it is anticipated that this paper will be helpful to Taiwan's financial institutions.

Suggested Citation

  • Su-Lien Lu & Chau-Jung Kuo, 2005. "How to gauge the credit risk of guarantee issues in a Taiwanese bills finance company: an empirical investigation using a market-based approach," Applied Financial Economics, Taylor & Francis Journals, vol. 15(16), pages 1153-1164.
  • Handle: RePEc:taf:apfiec:v:15:y:2005:i:16:p:1153-1164
    DOI: 10.1080/0960310052000345543
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    References listed on IDEAS

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    1. Kamhon Kan, 1998. "Credit spreads on government bonds," Applied Financial Economics, Taylor & Francis Journals, vol. 8(3), pages 301-313.
    2. Robert A. Jarrow & David Lando & Stuart M. Turnbull, 2008. "A Markov Model for the Term Structure of Credit Risk Spreads," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 18, pages 411-453 World Scientific Publishing Co. Pte. Ltd..
    3. Robert A. Jarrow & Stuart M. Turnbull, 2008. "Pricing Derivatives on Financial Securities Subject to Credit Risk," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 17, pages 377-409 World Scientific Publishing Co. Pte. Ltd..
    4. George Athanassakos & Peter Carayannopoulos, 2001. "An empirical analysis of the relationship of bond yield spreads and macro economic factors," Applied Financial Economics, Taylor & Francis Journals, vol. 11(2), pages 197-207.
    5. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    6. Laurence Copeland & Sally-Anne Jones, 2001. "Default probabilities of European sovereign debt: market-based estimates," Applied Economics Letters, Taylor & Francis Journals, vol. 8(5), pages 321-324.
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    Cited by:

    1. Chau-Jung Kuo & Chin-Ming Chen & Chao-Hsien Sung, 2011. "Evaluating guarantee fees for loans to small and medium-sized enterprises," Small Business Economics, Springer, vol. 37(2), pages 205-218, September.

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