01951cas a2200253 a 4500 AALejournalIMF007120 230101c9999 xx r poo 0 0eng d 5.00 USD 9781455227044 1018-5941 BD-DhAAL BD-DhAAL Segoviano, Miguel. Probabilities of Default and the Market Price of Risk in a Distressed Economy / Miguel Segoviano, Raphael Espinoza. Washington, D.C. : International Monetary Fund, 2011. 1 online resource (14 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students We propose an original method to estimate the market price of risk under stress, which is needed to correct for risk aversion the CDS-implied probabilities of distress. The method is based, for simplicity, on a one-factor asset pricing model. The market price of risk under stress (the expectation of the market price of risk, conditional on it exceeding a certain threshold) is computed from the price of risk (which is the variance of the market price of risk) and the discount factor (which is the inverse of the expected market price of risk). The threshold is endogenously determined so that the probability of the price of risk exceeding it is also the probability of distress of the asset. The price of risk can be estimated via different methods, for instance derived from the VIX or from the factors in a Fama-MacBeth regression. Mode of access: Internet Espinoza, Raphael. IMF Working Papers; Working Paper ; No. 2011/075 Full text available on IMF http://elibrary.imf.org/view/journals/001/2011/075/001.2011.issue-075-en.xml IMF e-Library