Document Type
Conference Proceeding
Publisher
The Econometric Society
Faculty
Faculty of Business and Law
School
School of Accounting, Finance and Economics / Finance, Economics, Markets and Accounting Research Centre
RAS ID
12947
Abstract
The severe bank stresses of the Global Financial Crisis (GFC) have underlined the importance of understanding and measuring extreme credit risk. The Australian economy is widely considered to have fared much better than the US and most other major world economies. This paper applies quantile regression and Monte Carlo simulation to the Merton structural credit model to investigate the impact of extreme asset value fluctuations on default probabilities of Australian companies in comparison to the USA. Quantile regression allows modelling of the extreme quantiles of a distribution which allows measurement of capital and PDs at the most extreme points of an economic downturn, when companies are most likely to fail. Daily asset value fluctuations of over 600 Australian and US investment and speculative entities are examined over a ten year period spanning pre-GFC and GFC. The events of the GFC also showed how the capital of global banks was eroded as defaults increased. This paper therefore also examines the impact of these fluctuating default probabilities on the capital adequacy of Australian and US banks. The paper finds highly significant variances in default probabilities and capital between quantiles in both Australia and the US, and shows how these variances can assist banks and regulators in calculating capital buffers to sustain banks through volatile times.
Access Rights
free_to_read
Comments
This is an Author's Accepted Manuscript of: Allen, D. E., Kramadibrata, A.R., Powell, R.J. , & Singh, A.K. (2011). Comparing Australian and US corporate default risk using quantile regression. Paper presented at the 2011 Australasian Meeting of the Econometric Society. Adelaide, Australia. Available here
The copyright to this article is held by the Econometric Society, http://www.econometricsociety.org/. It may be downloaded, printed and reproduced only for personal or classroom use. Absolutely no downloading or copying may be done for, or on behalf of, any for-profit commercial firm or for other commercial purpose without the explicit permission of the Econometric Society.