Estimating Default Probabilities Using Stock Prices: The Swedish Banking Sector During the 1990s Banking Crisis
The growing interest in management of credit risk and estimation of default probabilities has given rise to a range of more or less elaborate credit risk models. Hall and Miles (1990) suggests an approach of estimating failure probabilities based solely on stock market prices. The approach has the advantage of simplicity but relies on market efficiency to hold. In this paper we suggest an extension to the Hall and Miles (1990) model using extreme value theory and apply the extended model to the Swedish financial sector and to individual Swedish banks. The 15 year long sample in our study covers the period of the Swedish banking crisis of the early 1990s. We find a close correspondence between changes in the estimated probabilities of failure and the actual credit events occuring. Credit ratings from major credit rating agencies, on the other hand, are shown to react much less and much slower to credit quality changes.
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| Length: | 29 pages |
| Date of creation: | 01 Feb 2003 |
| Handle: | RePEc:uts:rpaper:92 |
| Contact details of provider: | Postal: PO Box 123, Broadway, NSW 2007, Australia Phone: +61 2 9514 7777 Fax: +61 2 9514 7711 Web page: http://www.qfrc.uts.edu.au/ More information through EDIRC
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- McNeil, Alexander J. & Frey, Rudiger, 2000. "Estimation of tail-related risk measures for heteroscedastic financial time series: an extreme value approach," Journal of Empirical Finance, Elsevier, vol. 7(3-4), pages 271-300, November.
- 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.
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