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The Contingent Claims Approach to Corporate Vulnerability Analysis; Estimating Default Risk and Economy-Wide Risk Transfer

Author

Listed:
  • Yingbin Xiao
  • Dale F. Gray
  • Cheng Hoon Lim
  • Michael T. Gapen

Abstract

In this paper, we examine the ability of the contingent claims approach (CCA) to identify corporate sector and economy-wide vulnerabilities. We apply the Moody's MfRisk model, which uses aggregated CCA principles, to assess vulnerabilities retroactively in two historical country cases. The results indicate that the method may prove helpful in identifying corporate sector vulnerabilities and estimating the associated value of risk transfer across interrelated balance sheets of the corporate, financial, and public sectors.

Suggested Citation

  • Yingbin Xiao & Dale F. Gray & Cheng Hoon Lim & Michael T. Gapen, 2004. "The Contingent Claims Approach to Corporate Vulnerability Analysis; Estimating Default Risk and Economy-Wide Risk Transfer," IMF Working Papers 04/121, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:04/121
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    References listed on IDEAS

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    1. Jones, E Philip & Mason, Scott P & Rosenfeld, Eric, 1984. " Contingent Claims Analysis of Corporate Capital Structures: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 39(3), pages 611-625, July.
    2. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters,in: Theory Of Valuation, chapter 8, pages 229-288 World Scientific Publishing Co. Pte. Ltd..
    3. Geske, Robert, 1979. "The valuation of compound options," Journal of Financial Economics, Elsevier, vol. 7(1), pages 63-81, March.
    4. 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.
    5. Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc.
    6. Fisher, Lawrence, 1984. " Contingent Claims Analysis of Corporate Capital Structures: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 39(3), pages 625-627, July.
    7. Crouhy, Michel & Galai, Dan & Mark, Robert, 2000. "A comparative analysis of current credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 59-117, January.
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    Citations

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    Cited by:

    1. Nuno Silva, 2010. "Inter-Sector Relations in the Portuguese Economy: an Application of Contingent," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
    2. Dale F. Gray & Elena Loukoianova & Samuel W. Malone & Cheng Hoon Lim, 2008. "A Risk-Based Debt Sustainability Framework; Incorporating Balance Sheets and Uncertainty," IMF Working Papers 08/40, International Monetary Fund.
    3. Martin CIHAK, 2007. "Systemic Loss: A Measure of Financial Stability (in English)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 57(1-2), pages 5-26, March.
    4. Arslanalp, Serkan & Liao, Yin, 2014. "Banking sector contingent liabilities and sovereign risk," Journal of Empirical Finance, Elsevier, vol. 29(C), pages 316-330.
    5. Martin Cihak & Petya Koeva Brooks, 2009. "From Subprime Loans to Subprime Growth? Evidence for the Euro Area," IMF Working Papers 09/69, International Monetary Fund.
    6. Marcos Souto & Benjamin M. Tabak & Francisco Vazquez, 2009. "Linking Financial and Macroeconomic Factors to Credit Risk Indicators of Brazilian Banks," Working Papers Series 189, Central Bank of Brazil, Research Department.
    7. International Monetary Fund, 2012. "Spain; Vulnerabilities of Private Sector Balance Sheets and Risks to the Financial Sector Technical Notes," IMF Staff Country Reports 12/140, International Monetary Fund.
    8. Ana Martinis & Igor Ljubaj, 2017. "Corporate Debt Overhang in Croatia: Micro Assessment and Macro Implications," Working Papers 51, The Croatian National Bank, Croatia.
    9. Dale F. Gray & Robert C. Merton & Zvi Bodie, 2007. "New Framework for Measuring and Managing Macrofinancial Risk and Financial Stability," NBER Working Papers 13607, National Bureau of Economic Research, Inc.
    10. Surach Tanboon & Suchot Piamchol & Tanawat Ruenbanterng & Paiboon Pongpaichet, 2009. "Impacts of Financial Factors on Thailand's Business Cycle Fluctuations," Working Papers 2009-01, Monetary Policy Group, Bank of Thailand.
    11. Dale F. Gray & Robert C. Merton & Zvi Bodie, 2006. "A New Framework for Analyzing and Managing Macrofinancial Risks of an Economy," NBER Working Papers 12637, National Bureau of Economic Research, Inc.
    12. Michael T. Gapen & Dale F. Gray & Cheng Hoon Lim & Yingbin Xiao, 2005. "Measuring and Analyzing Sovereign Risk with Contingent Claims," IMF Working Papers 05/155, International Monetary Fund.

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