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Factor Model for Stress-testing with a Contingent Claims Model of the Chilean Banking System
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Author/Editor: |
Gray, Dale F. | Walsh, James P |
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April 1, 2008 |
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Electronic Access: |
Free Full Text (PDF file size is 851KB)
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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.
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Summary: This paper derives risk indicators for the major Chilean banks based on contingent claims analysis, an extension of Black-Scholes-Merton option-pricing theory. These risk indicators are clearly tied to macroeconomic and financial developments in Chile and outside, but bank responses are highly heterogeneous. To reduce the number of variables linked to the banks' risk to a tractable number, we apply principal component analysis. Vector autoregressions of risk indicators with the most significant factors show strong ties from financial markets and regional developments. Impulse response functions from these factors are derived, which allow for scenario testing. The scenarios derived in the paper illustrate how the magnitude and persistence of responses of bank credit risk can vary across banks in the system.
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Series: |
Working Paper No. 08/89 |
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Subject(s): |
Working Paper | Chile |
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Author's keyword(s): |
contingent claims analysis | credit risk | factor model | VAR |
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Published: |
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April 1, 2008 |
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Format: |
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Paper |
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Stock No: |
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WPIEA2008089 |
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Pages: |
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37 |
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Price: |
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US$18.00
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