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Faculty Selected Works of Sel Dibooglu
Article
Bank default indicators with volatility clustering
Annals of Finance (2020)
  • Turalay Kenc, Central Bank of the Republic of Turkey
  • Emrah I. Cevik
  • Selahattin Dibooglu, University of Missouri-St. Louis
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Abstract
We estimate default measures for US banks using a model capable of handling volatility clustering like those observed during the Global Financial Crisis (GFC). In order to account for the time variation in volatility, we adapted a GARCH option pricing model which extends the seminal structural approach of default by Merton (J Finance 29(2):449, 1974) and calculated “distance to default” indicators that respond to heightened market developments. With its richer volatility dynamics, our results better reflect higher expected default probabilities precipitated by the GFC. The diagnostics show that the model generally outperforms standard models of default and offers relatively good indicators in assessing bank failures.
Keywords
  • Default risk,
  • Structural credit risk models,
  • Contingent claims,
  • GARCH option pricing,
  • Bank defaults
Disciplines
Publication Date
June, 2020
DOI
10.1007/s10436-020-00369-x
Citation Information
Turalay Kenc, Emrah I. Cevik and Selahattin Dibooglu. "Bank default indicators with volatility clustering" Annals of Finance (2020)
Available at: http://works.bepress.com/selahattin-dibooglu/53/