What Do Equity Markets Tell Us About the Drivers of Bank Default Risk? Evidence from Emerging Markets

33 Pages Posted: 15 Sep 2011

See all articles by Stefan Eichler

Stefan Eichler

Leibniz Universität Hannover; Halle Institute for Economic Research

Alexander Karmann

Technische Universitaet Dresden

Dominik Maltritz

Dresden University of Technology - Faculty of Economics and Business Management

Karol Sobanski

Dresden University of Technology

Date Written: September 15, 2011

Abstract

We use the option-based Merton (1974) model to derive the implicit probability of default of 218 banks in 24 emerging economies in the period 1995-2009 from their stock prices. This solvency indicator is well comparable between banks in different countries since it does not require the selection of bank default criteria. Moreover, the implicit default probability is a continuous measure of bank solvency and thus enables us to analyze the emergence of solvency problems of banks over time. Using a panel estimation approach we find that capital adequacy, asset and management quality, profitability, bank size and the engagement in investment banking are the main drivers of bank default risk from the shareholders’ perspective.

Keywords: bank default, risk, Merton model, stock market, emerging markets

JEL Classification: G21, G13, G28

Suggested Citation

Eichler, Stefan and Karmann, Alexander and Maltritz, Dominik and Sobanski, Karol, What Do Equity Markets Tell Us About the Drivers of Bank Default Risk? Evidence from Emerging Markets (September 15, 2011). Midwest Finance Association 2012 Annual Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1927788 or http://dx.doi.org/10.2139/ssrn.1927788

Stefan Eichler

Leibniz Universität Hannover

Institute of Money and International Finance
Koenigsworther Platz 1
Hannover, 30167
Germany

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Alexander Karmann (Contact Author)

Technische Universitaet Dresden ( email )

Muenchner Platz 1- 3
Dresden, 01069
Germany

Dominik Maltritz

Dresden University of Technology - Faculty of Economics and Business Management ( email )

Mommsenstrasse 13
Dresden, D-01062
Germany

Karol Sobanski

Dresden University of Technology ( email )

Einsteinstrasse 3
Dresden, 01062
Germany

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