nep-cfn New Economics Papers
on Corporate Finance
Issue of 2010‒07‒03
three papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. Accelerated Investment and Credit Risk under a Low Interest Rate Environment: A Real Options Approach By Tetsuya Yamada
  2. A systematic approach to multi-period stress testing of portfolio credit risk By Thomas Breuer; Martin Jandačka; Javier Mencía; Martin Summer
  3. Autoregressive multifactor APT model for U.S. Equity Markets By Malhotra, Karan

  1. By: Tetsuya Yamada (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: Empirical studies have found that a low interest rate environment accelerates firmsf investment and debt financing, leading to subsequent balance sheet problems in many countries in recent years. We examine the mechanism whereby firmfs debt financing and investment become more accelerated and the credit risk rises under a low interest rate environment from the perspective of a real options model. We find that firms tend to increase debt financing and investment not only under strong expectations of continued low interest rates but also when there are expectations of future interest rate increases, and such behavior causes higher credit risk. We also find that when future interest rate rises are expected, the investment decisions vary depending on how firms incorporate the possibility of future interest rises. Specifically, myopic firms make glast-minute investmentsh based on concerns over future interest rate hikes and this behavior increases their credit risk. In contrast, economically rational firms choose to decrease their investments, carefully considering the likelihood of future interest rate hikes.
    Keywords: Low interest rate environment, Investment behavior, Credit risk, Real options model, Corporate finance, Time-inconsistent discount rate, Behavioral economics
    JEL: G21 G32 G33 D81 D92
    Date: 2010–06
  2. By: Thomas Breuer (Research Centre PPE); Martin Jandačka (Research Centre PPE); Javier Mencía (Banco de España); Martin Summer (Oesterreichische Nationalbank)
    Abstract: We propose a new method for analysing multiperiod stress scenarios for portfolio credit risk more systematically than in the current practice of macro stress testing. Our method quantifies the plausibility of scenarios by considering the distance of the stress scenario from an average scenario. For a given level of plausibility our method searches systematically for the most adverse scenario for the given portfolio. This method therefore gives a formal criterion for judging the plausibility of scenarios and it makes sure that no plausible scenario will be missed. We show how this method can be applied to a range of models already in use among stress testing practitioners. While worst case search requires numerical optimisation we show that for practically relevant cases we can work with reasonably good linear approximations to the portfolio loss function that make the method computationally very efficient and easy to implement. Applying our approach to data from the Spanish loan register and using a portfolio credit risk model we show that, compared to standard stress test procedures, our method identifies more harmful scenarios that are equally plausible.
    Keywords: Stress Testing, Credit Risk, Worst Case Search, Maximum Loss
    JEL: G28 G32 G20 C15
    Date: 2010–06
  3. By: Malhotra, Karan
    Abstract: Arbitrage Pricing Theory is a one period asset pricing model used to predict equity returns based on a multivariate linear regression. We choose three sets of factors – Market specific, firm specific, and an autoregressive return term to explain returns on twenty U.S. stocks, using monthly data over the period 2000-2005. Our findings indicate that, apart from the CAPM beta factor, at least five other factors are significant in determining time series and cross sectional variations in returns. The times series regression establishes factor loadings and the cross sectional regression gives the risk premiums associated with these factors.
    Keywords: Equity Pricing; APT; Arbitrage pricing theory; Multifactor model; Security; Pricing; CAPM
    JEL: G12
    Date: 2010–04–15

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