The Contingent Claims Approach to Corporate Vulnerability Analysis: Estimating Default Risk and Economy-Wide Risk Transfer

Gapen, Michael; Gray, Dale F.; Lim, Cheng Hoon; Xiao, Yingbin

doi:10.2139/ssrn.878945

Cited by 17 publications

(13 citation statements)

References 16 publications

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“…The second, sovereign credit-at-risk, is the upper bound on gains or losses due to credit risk, which in this case is the value of the guarantee to the banking system. See Gapen, Gray, Lim, and Xiao (2004) for an example of how this could be modeled.…”

Section: Monte Carlo Simulationsmentioning

confidence: 99%

Measuring and Analyzing Sovereign Risk with Contingent Claims

et al. 2005

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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. This paper develops a comprehensive new framework to measure and analyze sovereign risk. Since traditional macroeconomic vulnerability indicators and accounting-based measures do not address risk in a comprehensive and forward-looking way, the contingent claims approach is used to construct a marked-to-market balance sheet for the sovereign, and derive a set of credit-risk indicators that serve as a barometer of sovereign risk. Applications to 12 emerging market economies show the risk indicators to be robust and highly correlated with market spreads. The framework can help policymakers design risk mitigation strategies and rank policy options using a calibrated structural model unique to each economy.

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Section: Monte Carlo Simulationsmentioning

confidence: 99%

Measuring and Analyzing Sovereign Risk with Contingent Claims

et al. 2005

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“…Once implied sovereign assets and sovereign assets volatility have been estimated, with information on sovereign 'equity' and 'equity volatility', expected losses from the banking sector are subtracted and the corresponding risk indicators re-estimated using the new values for assets and assets volatility. 9 SeeGapen, Gray, Lim, and Xiao (2004) for a more in-depth discussion of advantages and hurdles relating to the CCA.…”

mentioning

confidence: 99%

Measuring Sovereign Risk in Turkey: An Application of the Contingent Claims Approach

Keller

Kunzel²,

Souto³

2007

IMF Working Papers

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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.Improved macroeconomic conditions and changes to the asset-liability structure on Turkish balance sheets since the 2001 crisis have improved Turkey's overall sovereign risk profile. Nonetheless, the country remains subject to bouts of volatility, as evidenced most recently in the May/June 2006 market turbulence. This paper examines these changes in Turkey's risk profile using the Contingent Claims Approach (CCA), to quantify the evolution of Turkey's sovereign risk, relate risk indicators to market prices of risk, and conduct scenario analyses to assess the effects of potential market volatility and policy adjustments on key risk indicators.

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“…15 Another definition of the sovereign balance sheet is presented in the framework of the contingent claims analysis (CCA). The CCA approach (Gapen et al, 2004 and2005) includes foreign currency debt, domestic currency debt, and base money-where prices can be observed in the markets-as sovereign liabilities (Table 3). The market value and volatility of sovereign assets are derived from option pricing formulas that take the market price of domestic currency liabilities, volatility of domestic currency liabilities, foreign currency liabilities, risk-free interest rate, and time as inputs.…”

Section: Net Worthmentioning

confidence: 99%