Merton Model and Capital Measurement in Commercial Banks: A Case Study of Selected Emerging Countries in Southeast Asia

The most important parts of this mutation are the implementation of the Financial Sector Assessment Program (FSAP) and the development of new financial markets such as stock and bond markets. The recapitalization of damaged banks, bank mergers, and the participation of foreign banks in domestic banking sectors were the other supportive programs used to revive the banking system. See Domanski (2005), Jeon et al. (2011) and Santoso (2009).

Based on the definition of   Van Agtmael in 1981 (see van Agtmael 2007, 1–6) emerging countries have two features including rapid economic growth and industrialization. The International Monetary Fund added more criteria such as the share of foreign income, the degree of debt services and the external financial sources to distinguish the emerging countries. In addition, high return investment opportunity for foreign investment with high risk for investors is another feature of emerging countries. It must notice that emerging countries could be classified based on simple metric such as gross domestic product (GDP) per capita and individual’s judgments. Interestingly, South Korea’s GDP per capita is higher than other emerging countries and lower than developed countries. As a result, the individual’s judgment helps the investors to consider this country as an emerging country or developed one. According to Morgan Stanley Capital International (MSCI) classification South Korea is emerging market. Regarding the Singapore, the organizations like The Economist and MSU-CIBER, considered it as an emerging one. Hence, in this study Singapore is also considered as emerging country similar to other countries under study. Such consideration paves the way for a comparative examination of different countries in terms of growth and economic structure.

The main reason for using the risk-neutral measure was its reliability and availability. In contrast, the risk premium was not visible and had to be calculated with a high degree of uncertainty (Imerman 2011). On the other hand, as it is mentioned this model initially has been used for option pricing. In this regard, Capinski and Zastawniak (2003) showed, in risk–neutral probability condition, the current price of an option was equal to its expected discounted payoff. Combining this feature with equation 1 is foundation of the Black and Scholes (1973) model.

Almost 90% of deposits in 70% of banks have less than one year maturities. This ratio reaches to 100 in 23% of banks.

Itō’s lemma is a special calculation to derive the differential of a stochastic process as a function with time dependency. Ito (1944) expanded the Taylor series to determine the second derivatives of a function and show the square of an increasing in stochastic features following a change in time. The most famous application of this Lemma is to extract of Black and Scholes (1973) model.

The ratio of equity value to market value of the asset.