Deriving the Term Structure of Banking Crisis Risk with a Compound Option Approach: The Case of Kazakhstan
48 Pages Posted: 8 Jun 2016
Date Written: 2010
We use a compound option-based structural credit risk model to infer a term structure of banking crisis risk from market data on bank stocks in daily frequency. Considering debt service payments with different maturities this term structure assigns a separate estimator for short- and long-term default risk to each maturity. Applying the Duan (1994) maximum likelihood approach, we find for Kazakhstan that the overall crisis probability was mainly driven by short-term risk, which increased from 25% in March 2007 to 80% in December 2008. Concurrently, the long-term default risk increased from 20% to only 25% during the same period.
Keywords: Banking crisis, bank default, option pricing theory, compound option, liability structure
JEL Classification: G21, G17, G32, G12, G18
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