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How to gauge the credit risk of guarantee issues in a Taiwanese bills finance company: an empirical investigation using a market-based approach

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  • Su-Lien Lu
  • Chau-Jung Kuo

Abstract

This paper presents a formal methodology, using a market-based risk neutral approach, to gauge the credit risk of guarantee issues in a Taiwanese bills finance company. In particular, the probability of default is endogenously determined. Evidence shows that the recovery rate plays an important role in credit risk of a bills finance company's guarantee issues. On the other hand, credit risk is also correlated with different industries and business cycles, and care must be taken to consider these factors. Faced with the implementation of the Basel Capital Accord, it is anticipated that this paper will be helpful to Taiwan's financial institutions.

Suggested Citation

  • Su-Lien Lu & Chau-Jung Kuo, 2005. "How to gauge the credit risk of guarantee issues in a Taiwanese bills finance company: an empirical investigation using a market-based approach," Applied Financial Economics, Taylor & Francis Journals, vol. 15(16), pages 1153-1164.
    • Handle: RePEc:taf:apfiec:v:15:y:2005:i:16:p:1153-1164
    DOI: 10.1080/0960310052000345543
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    1. Chau-Jung Kuo & Chin-Ming Chen & Chao-Hsien Sung, 2011. "Evaluating guarantee fees for loans to small and medium-sized enterprises," Small Business Economics, Springer, vol. 37(2), pages 205-218, September.

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