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

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.