Published on a semi-annual basis, the Financial Stability Review primarily targets the key financial sector players and watchers : top executives, academics, market participants. It reviews current and structural developments affecting financial institutions, markets and their infrastructures. financial institution Changes to financial systems resulted in the surfacing of several sources of potential instability: financial bubbles, boots of volatility in capital markets, moving allocation of risks within participants… dept financial institution At the very heart of the financial system, central banks play a decisive role to maintain and preserve its stability. This is the reason why they carry out a thorough analysis of the robustness of its various components. financial stability review Aimed at fuelling debates and analysis, the Financial Stability Review is made of two parts. A general overview presents the salient trends and events that have marked the financial system in the course of the period under consideration and sheds light on on-going initiatives devoted to enhancing financial stability. financial system Those different contributions are summarised in the foreword. The theory of the firm developed by Merton in the 1970s shows how the two financing instruments used by firms, i.e. equity and debt may be viewed as options on the value of their assets. Thus, a shareholder may be regarded as a holder of a call option on the firm’s assets, while a lender may be seen as a seller of a put option on these same assets. market risk premium So-called structural models derived from this theory have been developed in recent years. They formalise the relationship between equity and debt, and more specifically, endeavour to assess the credit risk attached to each individual issuer on the basis of accounting data, such as its level of debt, and equity market data, such as volatility and stock prices. This article aims to describe these models and analyse the effect of the use of these models on capital markets from the perspective of financial stability financial market news By fostering interactions between asset classes, their increased use has opened up the different market segments and, ultimately, has contributed to the creation of a market continuum. asset management solution This type of quantitative analysis is thus likely to improve the way financial asset prices are formed, making relative asset prices more coherent and homogeneous. Developing models based on this approach is nevertheless a complex task and the relevance of this whole approach may be called into question if it gives rise to oversimplification or excessive confidence in the signals produced by such models.
