Cover IMF Working Papers
Buy Book in Print
Probabilities of Default and the Market Price of Risk in a Distressed Economy
Author:
Miguel A. Segoviano
Search for other papers by Miguel A. Segoviano in
Current site
Google Scholar Close
and
Mr. Raphael A Espinoza
Search for other papers by Mr. Raphael A Espinoza in
Current site
Google Scholar Close
Series:
IMF Working Papers
Volume/Issue:
Volume 2011: Issue 075
Language:
English
Publication Date:
01 Apr 2011
DOI:
https://doi.org/10.5089/9781455227044.001
ISBN:
9781455227044
ISSN:
1018-5941
Pages:
14
Keywords:
WP
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Download PDF (450.8 KB) Download Epub
We propose an original method to estimate the market price of risk under stress, which is needed to correct for risk aversion the CDS-implied probabilities of distress. The method is based, for simplicity, on a one-factor asset pricing model. The market price of risk under stress (the expectation of the market price of risk, conditional on it exceeding a certain threshold) is computed from the price of risk (which is the variance of the market price of risk) and the discount factor (which is the inverse of the expected market price of risk). The threshold is endogenously determined so that the probability of the price of risk exceeding it is also the probability of distress of the asset. The price of risk can be estimated via different methods, for instance derived from the VIX or from the factors in a Fama-MacBeth regression.
  • Collapse
  • Expand
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund