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on Corporate Finance |
| By: | Noss, Joseph (Bank of England) |
| Abstract: | Structured credit instruments offer an insight into markets’ perceptions of the extent of future credit defaults. Claims of different seniorities incur losses only if defaults reach different magnitudes, so their relative value offers an insight into the likelihood of losses being of different severities. This paper matches the traded values of structured credit products by modelling the defaults of the underlying credits and their interdependence. It offers an improvement on the industry-standard ‘Gaussian copula’ model in its ability to capture the ‘tail event’ of multiple firms defaulting together. This allows policymakers to draw better inference as to the likely scale of defaults implied by structured credit prices. It offers an indication of the extent to which defaults are driven by systemic shocks to firms’ balance sheets. It may also be of use to those who trade structured credit products and may offer an improvement in risk management. |
| Keywords: | Structured credit instruments; systemic risk; asset prices |
| JEL: | G12 |
| Date: | 2010–12–02 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0407&r=cfn |
| By: | Jan Novotny |
| Abstract: | This paper empirically analysis the price jump behavior of heavily traded US stocks during the recent financial crisis. Namely, I test the hypothesis that the recent financial turmoil caused no change in the price jump behavior. To accomplish this, I employ data on realized trades for 16 stocks and one ETF from the NYSE database. These data are at a 1-minute frequency and span the period from January 2008 to the end of July 2009, where the recent financial crisis is generally understood to start with the plunge of Lehman Brothers shares on September 9, 2008. I employ five model-independent and three model-dependent price jump indicators to robustly assess the price jump behavior. The results confirm an increase in overall volatility during the recent financial crisis; however, the results cannot reject the hypothesis that there was no change in price jump behavior in the data during the financial crisis. This implies that the uncertainty during the crisis was scaled up but the structure of the uncertainty seems to be the same. |
| Keywords: | financial markets; price jumps; extreme price movements; financial crisis |
| JEL: | P59 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp416&r=cfn |