nep-fmk New Economics Papers
on Financial Markets
Issue of 2009‒04‒18
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Financial Vulnerability in the Central and Eastern European Countries By Irène Andreou; Aleksandra Zdzienicka-Durand
  2. Global Yield Curves and Sovereign Bond Market Integration By ZHU Xiaoneng; Shahidur RAHMAN
  3. CAPM for Estimating the Cost of Equity Capital: Interpreting the Empirical Evidence By Zhi Da; Re-Jin Guo; Ravi Jagannathan
  4. CDO Pricing with Copulae By Barbara Choros; Wolfgang Härdle; Ostap Okhrin
  5. The Alchemy of CDO Credit Ratings By Efraim Benmelech; Jennifer Dlugosz

  1. By: Irène Andreou (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines); Aleksandra Zdzienicka-Durand (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: In this work we use a panel probit model to analyze the sources of financial vulnerability in four Central and Eastern European countries. The incontestable advantages of applying this method, associated with some elements of the non-parametric approach applied during the initial selection of the used indicators, allow us to accomplish, rather well, this objective.Indeed, the model performs considerably well in the sample and the whole approach can provide useful and supportive instruments for the study of financial vulnerabilities in transition economies.
    Keywords: Financial Vulnerability; Panel Probit Model; CEECs
    Date: 2009
  2. By: ZHU Xiaoneng (Division of Economics,School of Humanities and Social Sciences, Nanyang Technological University, Singapore); Shahidur RAHMAN (Nanyang Technological University, Singapore)
    Abstract: We extract global yield curve factors based on the affine arbitrage-free dynamic Nelson-Siegel model. The measure of integration proposed in the paper allows time-varying partial segmentation of national and global government bond markets. It takes into account the maturity structure of yields, therefore it is consistent in time series and cross-section as well. Though global factors and country-specific factors are highly correlated, the international bond market is less integrated than one might expected based on correlation analysis or prior knowledge of investment restrictions. The difference stems from 1) the integration asymmetry of factors:level factor is more integrated than slope and curvature factors; 2) heterogeneous factors dynamics: one factors integration may accompany the segmentation of other factors. Yet the expected integration is stable over the last two decades.
    Date: 2009–02
  3. By: Zhi Da; Re-Jin Guo; Ravi Jagannathan
    Abstract: We argue that the CAPM may be a reasonable model for estimating the cost of capital for projects in spite of increasing criticisms in the empirical asset pricing literature. Following Hoberg and Welch (2007), we first show that there is more support for the CAPM than has been previously thought. We then present evidence that is consistent with the view that the option to modify existing projects and undertake new projects available to firms may be an important reason for the poor performance of the CAPM in explaining the cross section of returns on size and book-to-market sorted stock portfolios. That lends support to the McDonald and Siegel (1985) and Berk, Green and Naik (1999) observation that stock returns need not satisfy the CAPM even when the expected returns on all individual projects do. From the perspective of a person who believes that the CAPM provides a reasonable estimate of the required return on elementary individual projects, the empirical evidence in the literature is not sufficient to abandon the use of the CAPM in favor of other models.
    JEL: G00 G11 G12 G31
    Date: 2009–04
  4. By: Barbara Choros; Wolfgang Härdle; Ostap Okhrin
    Abstract: Modeling the portfolio credit risk is one of the crucial issues of the last years in the financial problems. We propose the valuation model of Collateralized Debt Obligations based on a one- and two-parameter copula and default intensities estimated from market data. The presented method is used to reproduce the spreads of the iTraxx Europe tranches. The two-parameter model incorporates the fact that the risky assets of the CDO pool are chosen from six different industry sectors. The dependency among the assets from the same group is described with the higher value of the copula parameter, otherwise the lower value of the parameter is ascribed. Our approach outperforms the standard market pricing procedure based on the Gaussian distribution.
    Keywords: CDO, CDS, multifactor models, multivariate distributions, Copulae, correlation smile
    JEL: C14 G12 G13
    Date: 2009–03
  5. By: Efraim Benmelech; Jennifer Dlugosz
    Abstract: Collateralized Loan Obligations (CLOs) were one of the largest and fastest growing segments of the structured finance market, fueling the 2003-2007 boom in syndicated loans and leveraged buyouts. The credit crisis brought CLO issuance to a halt, and as a result the leveraged loan market dried up. Similar to other structured finance products, investors in CLOs rely heavily on credit rating provided by the rating agencies, yet little is known about CLO rating practices. This paper attempts to fill that gap. Using novel hand-collected data on 3,912 tranches of Collateralized Loan Obligations (CLO) we document the rating practices of CLOs and analyze their existing structures.
    JEL: G24 G28
    Date: 2009–04

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