Market-Based Estimation of Default Probabilities and its Application to Financial Market Surveillance

Author/Editor:

Jorge A Chan-Lau

Publication Date:

April 1, 2006

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper reviews a number of different techniques for estimating default probabilities from the prices of publicly traded securities. These techniques are useful for assessing credit exposure, systemic risk, and stress testing financial systems. The choice of techniques was guided by their ease of implementation and their applicability to a wide cross-section of countries and markets. Simple one-period cases are studied to sharpen the reader's intuition, and the usefulness of each technique for enhancing financial surveillance is illustrated with real applications.

Series:

Working Paper No. 06/104

Subject:

Asset prices Bonds Exchange rate policy surveillance Financial institutions Financial risk Financial sector International financial markets International financial system Securities markets Systemic risk

Frequency:

Biannually

English

Publication Date:

April 1, 2006

ISBN/ISSN:

9781451863642/1018-5941

Stock No:

WPIEA2006104

Format:

Paper

Pages:

19

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