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

April 1, 2006

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.

Subject: Asset and liability management, Asset prices, Asset valuation, Bonds, Credit default swap, Financial institutions, Money, Prices, Stocks

Keywords: Asia and Pacific, Asset prices, asset swap, Asset valuation, Bonds, CDS contract, CDS market, CDS spread, Credit default swap, credit derivatives securities, default probability, East Asia, equity price volatility, Europe, financial surveillance, financial system, Global, security prices, Stocks, systemic risk, value, WP

Pages:
19
Volume:
2006
DOI:
https://doi.org/10.5089/9781451863642.001
Issue:
104
Series:
Working Paper No. 2006/104
Stock No:
WPIEA2006104
ISBN:
9781451863642
ISSN:
1018-5941

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