Factor Model for Stress-Testing with a Contingent Claims Model of the Chilean Banking System

39 Pages Posted: 14 Apr 2008

See all articles by James P. Walsh

James P. Walsh

International Monetary Fund (IMF)

Dale F. Gray

International Monetary Fund (IMF); MF Risk

Date Written: April 2008

Abstract

This paper derives risk indicators for the major Chilean banks based on contingent claims analysis, an extension of Black-Scholes-Merton option-pricing theory. These risk indicators are clearly tied to macroeconomic and financial developments in Chile and outside, but bank responses are highly heterogeneous. To reduce the number of variables linked to the banks' risk to a tractable number, we apply principal component analysis. Vector autoregressions of risk indicators with the most significant factors show strong ties from financial markets and regional developments. Impulse response functions from these factors are derived, which allow for scenario testing. The scenarios derived in the paper illustrate how the magnitude and persistence of responses of bank credit risk can vary across banks in the system.

Keywords: Chile

Suggested Citation

Walsh, James P. and Gray, Dale F., Factor Model for Stress-Testing with a Contingent Claims Model of the Chilean Banking System (April 2008). IMF Working Papers, Vol. , pp. 1-37, 2008. Available at SSRN: https://ssrn.com/abstract=1119429

James P. Walsh (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Dale F. Gray

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

MF Risk

5921 Searl Terrace
Bethesda, MD 20816

Register to save articles to
your library

Register

Paper statistics

Downloads
223
Abstract Views
947
rank
137,958
PlumX Metrics