Articlebronze2004

An Option-Based Approach to Bank Vulnerabilities in Emerging Markets

Arnaud Jobert · Janet Kong · Jorge A. Chan‐Lau

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Credit Risk and Financial Regulations Banking stability, regulation, efficiency Financial Distress and Bankruptcy Prediction

Abstract

We measure bank vulnerability in emerging markets using the distance-to-default, a risk-neutral indicator based on Merton's (1974) structural model of credit risk. The indicator is estimated using equity prices and balance-sheet data for 38 banks in 14 emerging market countries. Results show it can predict a bank's credit deterioration up to nine months in advance. The distance-to-default, hence, may prove useful for bank monitoring purposes.

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1973The Pricing of Options and Corporate Liabilities 1974ON THE PRICING OF CORPORATE DEBT: THE RISK STRUCTURE OF INTEREST RATES*1973Theory of Rational Option Pricing 1974On the Pricing of Corporate Debt: The Risk Structure of Interest Rates 1998Leading Indicators of Currency Crises 1998The Determinants of Banking Crises in Developing and Developed Countries 2004Structural Models of Corporate Bond Pricing: An Empirical Analysis 1984Contingent Claims Analysis of Corporate Capital Structures: an Empirical Investigation

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