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on Risk Management |
| By: | Daniel Rosch (Leibniz Universitat Hannover); Harald Scheule (Hong Kong Institute for Monetary Research, The University of Melbourne) |
| Abstract: | The majority of industry credit portfolio risk models, as well as recent scientific results, are based on isolated modules for default probabilities and recoveries in the event of default. This paper shows that these common methods lead to various econometric drawbacks when the parameters are interpreted and aggregated for risk capital allocation and pricing purposes. This paper provides a top down approach in which individual credit risk parameters are derived analytically from a single model. This model allows for a i) dynamic, ii) consistent, and iii) unbiased modeling of credit portfolio risks. An empirical analysis provides evidence for the inferred relationship between credit quality, recovery and correlation. |
| Keywords: | Asset Value, Correlation, Credit Portfolio, Loss Given Default, Merton Model, Probability of Default, Recovery, Volatility |
| JEL: | G20 G28 C51 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:222009&r=rmg |
| By: | Breig, Christoph; Elsas, Ralf |
| Abstract: | In this paper, we address the question whether the impact of default risk on equity returns depends on the financial system firms operate in. Using an implementation of Merton's option-pricing model for the value of equity to estimate firms' default risk, we construct a factor that measures the excess return of firms with low default risk over firms with high default risk. We then compare results from asset pricing tests for the German and the U.S. stock markets. Since Germany is the prime example of a bank-based financial system, where debt is supposedly a major instrument of corporate governance, we expect that a systematic default risk effect on equity returns should be more pronounced for German rather than U.S. firms. Our evidence suggests that a higher firm default risk systematically leads to lower returns in both capital markets. This contradicts some previous results for the U.S. by Vassalou/Xing (2004), but we show that their default risk factor looses its explanatory power if one includes a default risk factor measured as a factor mimicking portfolio. It further turns out that the composition of corporate debt affects equity returns in Germany. Firms' default risk sensitivities are attenuated the more a firm depends on bank debt financing. |
| Keywords: | Asset pricing; Stochastic Discount Factor; Default Risk |
| JEL: | G12 |
| Date: | 2009–03–27 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:msmdpa:10978&r=rmg |
| By: | Petr Jakubik; Christian Schmieder |
| Abstract: | This study deals with credit risk modelling and stress testing within the context of a Merton-type one-factor model. We analyse the corporate and household sectors of the Czech Republic and Germany to find determining variables of credit risk in both countries. We find that a set of similar variables explains corporate credit risk in both countries despite substantial differences in the default rate pattern. This does not apply to households, where further research seems to be necessary. Next, we establish a framework for the stress testing of credit risk. We use a country specific stress scenario that shocks macroeconomic variables with medium severity. The test results in credit risk increasing by more than 100% in the Czech Republic and by roughly 40% in Germany. The two outcomes are not fully comparable since the shocks are calibrated according to the historical development of the time series considered and the size of the shocks for the Czech Republic was driven by the transformation period. |
| Keywords: | Credit risk, credit risk modelling, stress testing. |
| JEL: | G21 G28 G33 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2008/9&r=rmg |
| By: | Charles Yuji Horioka (Institute of Social and Economic Research - Osaka University); Shizuka Sekita (JSPS - Japan Society for the Promotion of Science - Japan Society for the Promotion of Science) |
| Abstract: | We analyze the effect of the degree of judicial enforcement on the probability of credit constraints, the amount of loan and the probability of default. Contrary to the traditional view on judicial efficiency of credit market, our estimation results show that better judicial enforcement increases the probability of being rationed and decreases credit granted by banks, consistent with laziness effects. In order to confirm the laziness effect more directly, we analyzed the effect of the degree of judicial enforcement on the probability of default and found that better judicial enforcement increases the probability of default, as expected. |
| Keywords: | Judicial enforcement; Credit allocation; Bankruptcy |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00407674_v1&r=rmg |
| By: | Ioana Alexopoulou (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Magnus Andersson (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Oana Maria Georgescu (KfW Bankengruppe, Palmengartenstraße 5-9, D-60325 Frankfurt am Main, Germany.) |
| Abstract: | Applied to the European markets, this paper analyzes the price of credit risk on the Credit Default Swap (CDS) and corporate bond markets by comparing the sensitivity of the credit spreads on each market to systematic, idiosyncratic risk factors and liquidity. Our analysis confirms the existence of a long-run relationship between the two markets, and the tendency for CDS markets to lead corporate bond markets in terms of price discovery. We find that the outbreak of the financial turmoil in the summer of 2007 induced a substantial increase in risk aversion and a shift in the pricing of credit risk, with CDS markets becoming more sensitive to systematic risk while cash bond markets priced in more information about liquidity and idiosyncratic risk. Moreover, the financial turbulence also brought about a systematic disconnection between the two markets caused by the significant change in the lead-lag relationship, with CDS markets always leading the cash bond markets. JEL Classification: G12, G14, G15. |
| Keywords: | Credit Default Swap Spreads, Corporate Bond Spreads, Liquidity. |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091085&r=rmg |