The Contingent Claims Approach to Corporate ... - CiteSeerX

For example, BCP Telecommunications, the wireless unit ..... For this analysis, a recovery rate of 80 percent was assumed for the banking sector .... currency hedge to the corporate sector), (iii) risk transfer strategies (e.g., signing contracts with.
905KB Sizes 0 Downloads 101 Views
WP/04/121

The Contingent Claims Approach to Corporate Vulnerability Analysis: Estimating Default Risk and Economy-Wide Risk Transfer Michael T. Gapen, Dale F. Gray, Cheng Hoon Lim, and Yingbin Xiao

© 2004 International Monetary Fund

WP/04/121

IMF Working Paper International Capital Markets Department The Contingent Claims Approach to Corporate Vulnerability Analysis: Estimating Default Risk and Economy-Wide Risk Transfer Prepared by Michael T. Gapen, Dale F. Gray, Cheng Hoon Lim, and Yingbin Xiao1 Authorized for distribution by Carlos Medeiros July 2004 Abstract 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.

In this paper, we examine the ability of the contingent claims approach (CCA) to identify corporate sector and economy-wide vulnerabilities. We apply the Moody’s MfRisk model, which uses aggregated CCA principles, to assess vulnerabilities retroactively in two historical country cases. The results indicate that the method may prove helpful in identifying corporate sector vulnerabilities and estimating the associated value of risk transfer across interrelated balance sheets of the corporate, financial, and public sectors. JEL Classification Numbers: G13, G32, G34 Keywords: Contingent claims approach, Corporate sector vulnerability, Credit risk Author’s E-Mail Address: [email protected]; [email protected]; [email protected]; [email protected]

1

Michael T. Gapen and Yingbin Xiao are Economists in the Capital Markets Financing Division of the IMF’s International Capital Markets Department. Dale F. Gray is President of the Macro Financial Risk Corporation and Consultant to the Macro Financial Risk Project, Moody’s Investors Service, New York, New York. Cheng Hoon Lim is the Deputy Division Chief in the IMF’s Capital Markets Financing Division of the International Capital Markets Department. This paper was presented at the conference on “Corporate Restructuring: International Best Practices,” hosted by the World Bank, Washington, D.C., March 22, 2004, and will be published in the forthcoming conference volume under the same name.

-2-

Contents

Page

I.

Introduction ............................................................................................................................ 4

II.

Contingent Claims Analysis................................................................................................... A. The CCA Methodology .............................................................................................. B. Distance to Distress and Probability of Default ......................................................... C. Moody’s MfRisk Model: Contingent Claims Analysis in a Multisector Framework...............................................................................................................

5 7 8 9

III. Assessing Corporate Sector Vulnerabilities............................................................................10 A. The Brazilian Corporate Sector ..................................................................................11 B. CCA and Financial Market Uncertainty in Brazil in 2002 .........................................12 C. The Thai Corporate Sector..........................................................................................13 D. CCA and the Crisis in Thailand in 1997 ....................................................................15 IV. Multisector Contingent Claims Analysis............................................................................... 16 A. Multisector CCA—Brazil...........................................................................................16 B.