New Economics Papers
on Financial Markets
Issue of 2008‒12‒01
three papers chosen by

  1. Behind the 2008 Capital Market Collapse By C-René Dominique
  2. Models for Moody’s bank ratings By Peresetsky , Anatoly; Karminsky, Alexander
  3. A value at risk analysis of credit default swaps. By Burkhard Raunig; Martin Scheicher

  1. By: C-René Dominique
    Abstract: Greed and the unethical behavior of financial institutions obviously played a part in the collapse of the world capital market in 2008. But, this paper argues that the main culprits are the neo-liberal ideology (requiring ever smaller gov-ernments and privatization) and the flawed theories of risk assessment. It also finds that given the fact that market economies are fractal structures, the objective assessment and / or the quantification of risks is not even possible. It concludes with some recommendations as to how to avoid future collapses.
    Keywords: Efficiency and self-correction in market economies; Linear-positive and non-linear modelings; creative destruction of coefficients; determinism and randomness, and risk assessment.
    JEL: E22
    Date: 2008–10–26
  2. By: Peresetsky , Anatoly (BOFIT); Karminsky, Alexander (BOFIT)
    Abstract: The paper presents an econometric study of the two bank ratings assigned by Moody's Investors Service. According to Moody’s methodology, foreign-currency long-term deposit ratings are assigned on the basis of Bank Financial Strength Ratings (BFSR), taking into account “external bank support factors” (joint-default analysis, JDA). Models for the (unobserved) external support are presented, and we find that models based solely on public information can reasonably well approximate the ratings. It appears that the observed rating degradation can be explained by growth of the banking system as a whole. Moody’s has a special approach for banks in developing countries and Russia in particular. The models help reveal the factors that are important for external bank support.
    Keywords: banks; ratings; rating model; risk evaluation; early warning system
    JEL: G21 G32
    Date: 2008–11–21
  3. By: Burkhard Raunig (Oesterreichische Nationalbank, Otto-Wagner-Platz 3, A–1011 Vienna, Austria.); Martin Scheicher (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We investigate the risk of holding credit default swaps (CDS) in the trading book and compare the Value at Risk (VaR) of a CDS position to the VaR for investing in the respective firm’s equity using a sample of CDS – stock price pairs for 86 actively traded firms over the period from March 2003 to October 2006. We find that the VaR for a stock is usually far larger than the VaR for a position in the same firm’s CDS. However, the ratio between CDS and equity VaR is markedly smaller for firms with high credit risk. The ratio also declines for longer holding periods. We also observe a positive correlation between CDS and equity VaR. Panel regressions suggest that our findings are consistent with qualitative predictions of the Merton (1974) model. JEL Classification: E43, G12, G13.
    Keywords: Credit Default Swap, Value at Risk, Structural Credit Risk Models.
    Date: 2008–11

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