n Studies in Economics and Econometrics - Structural default models applied to South African banks

Volume 32, Issue 1
  • ISSN : 0379-6205


We modify the structural default model of Merton to make it more readily applicable to banking firms in South Africa. In essence the modification assumes that both assets and liabilities follow geometric Brownian motion dynamics and then treats the equity of the bank as the value of swap options rather than a call option as is done in the traditional Merton model. We fit this new model to the data of three leading South African banks and find that it fits quite well and leads to useful and realistic failure probability and buffer capital results.

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