default correlation an empirical investigation of a subprime lender in recent years subprime lending has grown substantially as an important sector of the credit markets this paper is concerned with the risk management of subprime loan portfolios and the importance of default correlation in measuring that risk using a large portfolio of residential subprime loans from an anonymous subprime lender we show that default correlation is substantial for this lender in particular the significance of default correlation increases as the internal credit rating declines our results suggest that lenders and regulators would be well served investing in the understanding of default correlation in subprime portfolios

credit and market risks measurement in carbon financing for chinese banks abstract this paper concerns the risk analysis of six chinese banks which are involved in carbon financing factor copula is introduced to simulate the corresponding carbon finance credit risk and market risk by latent variables in an indirect method in short the four common factors in carbon financing exchange rates interest rates cer price and brent oil prices are analyzed and explored in factor copula approach that incorporates kmv garch models in two steps the kmv and garch models are used to generate data that reflects the overall credit and market risk associated with each bank both normal copula and t copula functions are used to simulate the parameter estimations for comparison in a new way the value at risk for each of the six banks is calculated through a monte carlo simulation and compared additionally we calculate shock estimates for each factor to explore the changes in both credit risk and market risk given economic shocks also make a hypothetical analysis of the impact of the financial crisis on common factors overall our findings reveal that exchange rates and oil prices are the key factors to consider in carbon financing ping an bank is facing the most risk of all the banks in the sample while the industrial and commercial bank of china is carrying the least risk the results of this analysis gave provide some insight into domestic carbon trading and carbon markets connectivity

economic and regulatory capital allocation for revolving retail exposures abstract we present two internal capital allocation models and compare the capital ratios they generate with those prescribed by the latest revision of basel s new capital accord proposal for advanced retail portfolios which allows for explicit future margin income recognition given a test portfolio of credit card exposures that we assemble we find that basel s ratios are closer to those generated by our models for low credit risk segments we attribute the discrepancies to the different ways basel and our models account for future margin income to basel s assumptions about asset correlations and to one model taking macroeconomic conditions into account

the generalized multinomial logit model accounting for scale and coefficient heterogeneity the mixed or heterogeneous multinomial logit mixl model has become popular in a number of fields especially marketing health economics and industrial organization in most applications of the model the vector of consumer utility weights on product attributes is assumed to have a multivariate normal mvn distribution in the population thus some consumers care more about some attributes than others and the iia property of multinomial logit mnl is avoided i e segments of consumers will tend to switch among the subset of brands that possess their most valued attributes the mixl model is also appealing because it is relatively easy to estimate recently however some researchers have argued that the mvn is a poor choice for modelling taste heterogeneity they argue that much of the heterogeneity in attribute weights is accounted for by a pure scale effect i e across consumers all attribute weights are scaled up or down in tandem this implies that choice behaviour is simply more random for some consumers than others i e holding attribute coefficients fixed the scale of their error term is greater this leads to a scale heterogeneity mnl model s mnl here we develop a generalized multinomial logit model g mnl that nests s mnl and mixl by estimating the s mnl mixl and g mnl models on 10 data sets we provide evidence on their relative performance we find that models that account for scale heterogeneity i e g mnl or s mnl are preferred to mixl by the bayes and consistent akaike information criteria in all 10 data sets accounting for scale heterogeneity enables one to account for extreme consumers who exhibit nearly lexicographic preferences as well as consumers who exhibit very random behaviour in a sense we formalize below

an approximation method for analysis and valuation of credit correlation derivatives abstract this paper presents a model for approximating the value of a basket of default correlated assets and analyzes subordinate tranches in securitized debt obligations the model is calibrated to an intensity based simulation of correlated defaults and represents an alternative computation method to full monte carlo simulation timing of individual obligor defaults are driven by intensity processes and collateral value is modeled with a jump diffusion process where the number of jumps corresponds to the total number of defaults in the asset pool this approach allows decomposition of subordinate obligations in terms of a collection of simpler securities and yields useful risk management information

credit risk drivers evaluating the contribution of firm level information and of macroeconomic dynamics abstract understanding if credit risk is driven mostly by idiosyncratic firm characteristics or by systematic factors is an important issue for the assessment of financial stability by exploring the links between credit risk and macroeconomic developments we observe that in periods of economic growth there may be some tendency towards excessive risk taking using an extensive dataset with detailed information for more than 30 000 firms we show that default probabilities are influenced by several firm specific characteristics when time effect controls or macroeconomic variables are also taken into account the results improve substantially hence though the firms financial situation has a central role in explaining default probabilities macroeconomic conditions are also very important when assessing default probabilities over time

the asymmetric behavior and procyclical impact of asset correlations abstract this paper examines the behavior of asset correlations with the market returns in the asymptotic single risk factor asrf approach of the basel ii accord on regulatory capital requirement over a sample period from 1988 to 2007 we find that asset correlations are positively related to firm size but negatively related to firm default probability asset correlations are also industry specific as firms in media transportation pharmaceutical and semiconductor industries exhibit higher asset correlations than those in retail and consumer staples most importantly asset correlations are asymmetric and have a procyclical impact on the real economy after controlling for these effects they tend to rise during economic downturns but decline during economic upturns the average magnitude of the rise is larger than that of the decline these findings suggest that asset correlations may be underestimated during economic downturns and may provide policy implications for the capital requirement framework

a comparative analysis of current credit risk models the new bis 1998 capital requirements for market risks allows banks to use internal models to assess regulatory capital related to both general market risk and credit risk for their trading book this paper reviews the current proposed industry sponsored credit value at risk methodologies first the credit migration approach as proposed by jp morgan with creditmetrics is based on the probability of moving from one credit quality to another including default within a given time horizon second the option pricing or structural approach as initiated by kmv and which is based on the asset value model originally proposed by merton merton r 1974 journal of finance 28 449 470 in this model the default process is endogenous and relates to the capital structure of the firm default occurs when the value of the firm s assets falls below some critical level third the actuarial approach as proposed by credit suisse financial products csfp with creditrisk and which only focuses on default default for individual bonds or loans is assumed to follow an exogenous poisson process finally mckinsey proposes creditportfolioview which is a discrete time multi period model where default probabilities are conditional on the macro variables like unemployment the level of interest rates the growth rate in the economy which to a large extent drive the credit cycle in the economy 2000 elsevier science b v all rights reserved

regulatory implications of credit risk modelling abstract this introduction places in context the papers on credit risk modelling contained in the special issue we explain why credit risk modelling has become such a focus of interest for practitioners and financial supervisors even though as we explain the current modelling technologies have significant weaknesses they offer the possibility of major changes in the ways banks are managed and regulated the main impediment to greater use of these models especially by regulators is the difficulty involved in back testing the risk measures they produce we suggest some thoughts on how back testing and other types of model assessment might be performed

estimating systemic risk in the international financial system this paper develops three distinct methods to quantify the risk of a systemic failure in the global banking system we examine a sample of 334 banks representing 80 of global bank equity in 28 countries around five global financial crises our results suggest statistically significant but economically small increases in systemic risk although policy responses are endogenous the low estimated probabilities suggest that the distress of central bankers regulators and politicians about the events we study could be overstated and that current policy responses to financial crises could be adequate to handle major macroeconomic events

do house prices drive consumption growth the coincident cycles of house prices and consumption in the uk this paper uses a realistic structural lifecycle model of consumption and housing decisions to understand how data might distinguish different mechanisms that explain the correlation between house prices and consumption the model includes price and earnings shocks estimated from data the latter including aggregate and idiosyncratic components and incorporates realistic features of the uk mortgage market we simulate the model using more than 30 years of realized shocks and under counterfactual scenarios our results confirm the intuition of earlier studies house price shocks should have a larger effect on the consumption of older households and earnings shocks on young households

on the recoverability of choice behaviors with random coefficients choice models in the context of limited data and unobserved effects random coefficients choice models are seeing widespread adoption in marketing research partly because of their ability to generate household level parameter estimates with limited data however the power of such models may tempt researchers to trust that they continue to produce reasonable estimates when in fact either model misspecification or insufficient data limits the models ability to recover household level parameters successfully if household level choice behaviors are not recovered successfully managerial decisions such as marketing mix planning and targeting direct marketing segmentation and forecasting may not produce the desired results this study addresses the following questions first can random coefficients choice models correctly identify markets characterized by preference and response heterogeneity state dependence the use of alternative decision heuristics that result in reduced choice sets and combinations of these effects if so how much data is required and is this realistic given the size of data sets typically used in marketing analyses which model selection criteria should be used to identify these markets when there is spurious market identification which parameters contribute to the spurious result an extensive simulation experiment is conducted wherein random coefficients logit models with varying specifications of parameter heterogeneity state dependence effects and choice set heterogeneity are applied to 128 experimental conditions the results show which types of markets can be identified reliably and which cannot based on the results of the simulation the authors develop a model selection heuristic that identifies the correct market in 81 of the experimental conditions in contrast strict application of the best model selection criterion alone results in correct market identification in at most 34 of experimental conditions interestingly we find that the amount of data number of households or number of purchases per household does not affect our ability to identify the correct market type with this heuristic so there is a good chance of identifying the correct market type even when little data is available

commentary on the interpretation of temporal inflation parameters in stochastic models of judgment and choice the implications of salisbury and feinberg s 2010 paper salisbury l c f m feinberg 2010 alleviating the constant stochastic variance assumption in decision research theory measurement and experimental test marketing sci 29 1 1 17 for the process of model development and testing in the field of intertemporal choice analysis is explored although supporting the overall thrust of salisbury and feinberg s critique of previous empirical work in the area we also see their paper as illustrating the dangers of drawing strong inferences about the behavioral interpretation of statistical model parameters without seeking convergent empirical evidence in particular we are skeptical about the extent to which the reported effects of temporal distance on the estimated scale parameter c are uniquely or even primarily due to unobserved error inflation that reflects consumer s uncertainty about future utility this interpretation is brought into question by several lines of reasoning conceptually we note that uncertainty is different from error and that for choice data the error inflation model is mathematically identical to a model in which the scale parameter is a deterministic function of the temporal discount rate empirically a reanalysis of data from previously published experiments does not consistently support temporal error inflation temporal convergence of choice shares or the scale parameter as an explanation of variety seeking in choice sequences in our opinion the cumulative results of research on intertemporal choice require models in which the attributes of choice alternatives are differentially discounted over time despite these findings we advocate that choice researchers should indeed follow salisbury and feinberg s advice to not assume that error variances will be unaffected by experimental manipulations and such effects should be explicitly modeled we also agree that uncovering effects on error variance is just the first step and the ultimate goal should be to rigorously explain the reasons for such effects

the uk consumption boom of the late 1980s aggregate implications of microeconomic evidence two competing explanations of the uk consumer boom in the late 1980s are the financial liberalisation imperfect housing market hypothesis of muellbauer and murphy and the expectations hypothesis of king we use 15 years of family expenditure surveys and cohort analysis to investigate to what extent these two hypotheses agree with observed changes in consumption patterns we find that the housing markets explanation accounts for much of the increase by older cohorts but cannot be reconciled with the marked rise in expenditure levels of younger households a simple simulation exercise shows instead that the expectations hypothesis can generate increases of expenditure by young consumers of the magnitude observed in our data

luxuries are easier to postpone a proof we show that marshallian income elasticities are proportional to frisch own price elasticities if all goods are additively separable this implies that luxuries are likely to be easier to postpone it also implies that preferences over consumption are unlikely to display a constant elasticity of substitution

cyclical correlations credit contagion and portfolio losses abstract we model aggregate credit losses on large portfolios of financial positions contracted with firms subject to both cyclical default correlation and direct default contagion processes cyclical correlation is due to the dependence of firms on common economic factors contagion is associated with the local interaction of firms with their business partners we provide an explicit normal approximation of the distribution of portfolio losses we quantify the relation between the variability of global economic fundamentals strength of local firm interaction and the fluctuation of losses we find that cyclical oscillations in fundamentals dominate average losses while local interaction causes additional fluctuations of losses around their average the strength of the contagion induced loss variability depends on the complexity of the business partner network

the stock market housing and consumer spending a survey of the evidence on wealth effects abstract this paper examines the time series and micro econometric evidence on the relationship between stock and house prices and consumer spending the time series studies distinguish between short run and long run links between consumption income and wealth they allow us to identify which variables adjust to restore the long run equilibrium in the case of a shock and to determine the time taken by the adjustment process the micro econometric literature improves our understanding of the link between wealth and expenditure and distinguishes among the alternative hypotheses of direct wealth effect common causality and collateral channel that have been proposed to explain this relationship the relationship between wealth and consumer spending appears to be strong but there is some disagreement as to its size and nature furthermore there appear to be some important differences across countries which should be allowed for by policy makers when appraising the policy implications of a change in asset prices

modeling parametric evolution in a random utility framework random utility models have become standard econometric tools allowing parameter inference for individual level categorical choice data such models typically presume that changes in observed choices over time can be attributed to changes in either covariates or unobservables we study how choice dynamics can be captured more faithfully by also directly modeling temporal changes in parameters using a vector autoregressive process and bayesian estimation this approach offers a number of advantages for theorists and practitioners including improved forecasts prediction of long run parameter levels and correction for potential aggregation biases we illustrate the method using choices for a common supermarket good where we find strong support for parameter dynamics

a guide to choosing absolute bank capital requirements resampling implementation of a stress scenario approach to estimating portfolio default loss distributions is proposed as the basis for estimates of the appropriate absolute level of economic capital allocations for portfolio credit risk estimates are presented for stress scenarios of varying severity and implications of different time horizons are analyzed results for a numeraire portfolio are quite sensitive to such variations although the analysis is framed in terms of recent proposals to revise regulatory capital requirements for banks the arguments and results are also relevant for bankers making capital structure decisions

evaluating systemic risk using bank default probabilities in financial networks in this paper we propose a novel methodology to measure systemic risk in networks composed of financial institutions our procedure combines the impact effects obtained from stress measures that rely on feedback centrality properties with the default probabilities of institutions we also present new heuristics for designing feasible and relevant stress testing scenarios that can subside regulators in financial system surveillance tasks we develop a methodology to extract banking communities and show that these communities have a relevant effect on systemic risk we find that these communities are mostly composed of non large banks suggesting that regulators should also broaden their surveillance efforts to these banking communities other than to the usual sifis and large banks finally our results provide insights and guidelines for policymakers

rejoinder temporal stochastic inflation in choice based research we examine the specification and interpretation of discrete choice models used in behavioral theory testing with a focus on separating coefficient scale from error scale particularly over time numerous issues raised in the thoughtful commentaries of louviere and swait louviere j j swait 2010 discussion of alleviating the constant stochastic variance assumption in decision research theory measurement and experimental test marketing sci 29 1 18 22 and hutchinson zauberman and meyer hzm hutchinson j w g zauberman r meyer 2010 on the interpretation of temporal inflation parameters in stochastic models of judgment and choice marketing sci 29 1 23 31 are addressed specifically the roles of response scaling preference covariates actual versus hypothetical consumption immediacy and heterogeneity as well as key differences between the experimental setup in salisbury and feinberg salisbury l c f m feinberg 2010 alleviating the constant stochastic variance assumption in decision research theory measurement and experimental test marketing sci 29 1 1 17 and those typifying intertemporal choice and construal level theory we strongly concur with most of the general conclusions put forth by the commentary authors but we also emphasize a central point made in our research that may have been lost that the temporal inflation effects observed in our empirical analysis could be attributed to stochastic effects deterministic influences or an amalgam appropriate inferences depend on the nature of one s data and stimuli we also report on further analyses of our data as well as a meta analysis of hzm s table 1 that is consistent with our original findings implications for and dimensions relevant to future research on temporal stochastic inflation and its role in choice based research are discussed

integrated models of capital adequacy why banks are undercapitalised with the majority of large uk and many us banks collapsing or being forced to raise capital over the 2007 9 period blaming bankers may be satisfying but is patently insucient basel ii and federal oversight frameworks also deserve criticism we propose that the current methodological void at the heart of basel ii pillar 2 is filled with the recommendation that banks develop fully integrated models for economic capital that relate asset values to fundamental drivers of risk in the economy to capture systematic eects and inter asset dependencies in a way that crude correlation assumptions do not we implement a fully integrated risk analysis based on the balance sheet of a representative eurobank using an economic scenario generation model calibrated to conditions at the end of 2007 our results suggest that the more modular correlation based approaches to economic capital that currently dominate practice will have led to an undercapitalisation of banks a

booms and busts consumption house prices and expectations over much of the past 25 years house price and consumption growth have been closely synchronized three main hypotheses for this have been proposed increases in house prices raise household wealth and so their consumption house price growth reduces credit constraints by increasing the collateral available to homeowners and house prices and consumption are together influenced by common factors using microeconomic data we find that the relationship between house prices and consumption is stronger for younger than older households contradicting the wealth channel we suggest that common causality has been the most important factor linking house prices and consumption

selecting an optimal portfolio of consumer loans by applying the state preference approach abstract internal models like creditmetrics and kmv implemented by banks to manage credit risk and assess regulatory capital are significant examples of how practitioners apply modern portfolio theory mpt to the management of bank loan portfolios from a theoretical perspective there are several reasons suggesting to be careful in extending mpt to the case of bank loan portfolios selection in order to avoid misleading results specifically loans log returns are non normally distributed random variables furthermore decision makers not necessarily perform a quadratic utility function because both of those reasons the traditional mean variance approach is inadequate in building up optimal loan portfolios such a conclusion is even more relevant if specific categories of loans are considered in our paper we deal with the problem of selecting optimal portfolios of consumer loans by developing a state preference model it allows us not to explicitly consider the distributional properties of loans log returns the model is a static one having the objective to select the loan portfolio maximizing the expected utility of wealth allocated by the bank managers subject to a number of constraints accounting for fundamental strategic choices implemented by the bank managers our results show that flexibility is the main characteristic of our model in fact adding constraints gives new optimal portfolios without reducing the expected utility of the decision maker we will explain that such a result does not depend on constraints misspecification but on the risk structure implied in the state preference approach

on the use of portfolio risk models and capital requirements in emerging markets a portfolio based model creditrisk of credit suisse first boston and recent central bank of argentina credit bureau data are used to estimate whether current capital and provisioning regulations match actual risks arguing that provisions should cover expected losses and that capital requirements should cover potential losses beyond expected losses subject to some statistical level of tolerance the article assesses how well actual capital and provisioning requirements match the estimated requirements given by the model actual provisioning requirements were found to be close to implied levels of expected losses the estimate of potential losses was found to be highly sensitive to the assumptions of the model especially the parameter relating the volatility of a loan s rate of default to its mean value this volatility parameter cannot be estimated accurately with the credit bureau data because of the short time span covered so proxy data were used to estimate it and two values around that estimate

decomposing the wealth effect on consumption we decompose the wealth effect on consumption into two components first we distinguish between exogenous and endogenous wealth changes second we distinguish between anticipated and unanticipated exogenous changes we estimate the impact of exogenous components using data from the 2008 2010 panel of the italian survey of household income and wealth the wealth effect is about 3 cents per unexpected euro increase in wealth and driven by house price changes the consumption response to anticipated changes in wealth is of similar magnitude and also driven by housing we show that these findings are consistent with binding borrowing constraints

the interaction between the financial and investment decisions of the firm the case of issuing warrants in a levered firm abstract in this paper we analyze the value of warrants and stock in a firm that has both equity and debt in its capital structure and assume that the proceeds from exercising the warrants are reinvested in the firm the effect of potential future scale investment on the firm s stock debt and warrants are investigated the warrants in our analysis are european in this framework there are two sources for the nonstationarity of the rate of return on any kind of financial claim the first stems from changes in the firm s capital structure and the second is due to the potential scale increase in the value of the firm should the warrants be exercised the effect of a potential transfer of wealth from equity holders to debt holders at time of exercise is analyzed when warrants are exercised and the proceeds are reinvested in a scale expansion project the probability of default may decrease it follows therefore that ceteris paribus debt is likely to appreciate in value at the expense of equity the method of pricing by arbitrage as proposed by harrison and kreps is used to derive values for claims on the firm problems associated with measuring the volatility of equity are discussed

the collateral value of fine art in this paper we examine the effect of implicit seller reserves on the estimation of value at risk based on historical asset sales data we direct our examination toward how and whether fine art might prove an appropriate form of loan collateral for banks and other financial institutions using a data set of french impressionist paintings brought to auction from 1985 to 2001 we control for the effect of works that are bought in house to construct a distribution of potential sale values that corrects for sample selection bias it turns out that the downside risk surrounding deviations of auction prices from expert presale estimates depends critically on how buy ins are incorporated if downside risk is assessed solely on historical experience with successful auction sales the data appear to support loan to value ratios between 50 and a 100 larger than loan to value ratios that countenance the existence of seller reserves the auction process however is quantifiable and can reveal the necessary risk information required for loan consideration

alleviating the constant stochastic variance assumption in decision research theory measurement and experimental test analysts often rely on methods that presume constant stochastic variance even though its degree can differ markedly across experimental and field settings this reliance can lead to misestimation of effect sizes or unjustified theoretical or behavioral inferences classic utility based discrete choice theory makes sharp testable predictions about how observed choice patterns should change when stochastic variance differs across items brands or conditions we derive and examine the implications of assuming constant stochastic variance for choices made under different conditions or at different times in particular whether substantive effects can arise purely as artifacts these implications are tested via an experiment designed to isolate the effects of stochastic variation in choice behavior results strongly suggest that the stochastic component should be carefully modeled to differ across both available brands and temporal conditions and that its variance may be relatively greater for choices made for the future the experimental design controls for several alternative mechanisms e g flexibility seeking and a series of related models suggest that several econometrically detectable explanations like correlated error state dependence and variety seeking add no explanatory power a series of simulations argues for appropriate flexibility in discrete choice specification when attempting to detect temporal stochastic inflation effects

wealth shocks unemployment shocks and consumption in the wake of the great recession we use data from the 2009 internet survey of the health and retirement study to examine the consumption impact of wealth shocks and unemployment during the great recession in the us we find that many households experienced large capital losses in housing and in their financial portfolios and that a non trivial fraction of respondents have lost their job as a consequence of these shocks many households reduced substantially their expenditures we estimate that the marginal propensities to consume with respect to housing and financial wealth are 1 and 3 3 percentage points respectively in addition those who became unemployed reduced spending by 10 percent we also distinguish the effect of perceived transitory and permanent wealth shocks splitting the sample between households who think that the stock market is likely to recover in a year s time and those who don t in line with the predictions of standard models of intertemporal choice we find that the latter group adjusted much more than the former its spending in response to financial wealth shocks

the effect of the financial crisis on the retirement plans of older workers in england this letter revisits the question of how wealth shocks influence retirement behaviour exploiting the dramatic changes in uk asset prices between 2008 and 2009 as a source of such shocks we find no evidence that the wealth shocks arising from this recent financial crisis affected the retirement plans of older workers in england

modeling heterogeneity and state dependence in consumer choice behavior in frequently purchased consumer goods markets consumer brand choices exhibit substantial persistence across purchase occasions in this article i estimate a choice model that admits of both heterogeneity in preferences and true state dependence as sources of this persistence using nielsen scanner data on ketchup i find evidence for true state dependence in the choice process even after controlling for a rich heterogeneity structure simulation of the model indicates that the long term effect of a promotion induced purchase on future purchase probabilities is positive but small

an integrated pricing model for defaultable loans and bonds abstract in recent years credit risk has played a key role in risk management issues practitioners academics and regulators have been fully involved in the process of developing studying and analysing credit risk models in order to find the elements which characterize a sound risk management system in this paper we present an integrated model based on a reduced pricing approach for market and credit risk its main features are those of being mark to market and that the spread term structure by rating class is contingent on the seniority of debt within an arbitrage free framework we introduce issues such as the integration of market and credit risk the use of stochastic recovery rates and recovery by seniority moreover we will characterize default risk by estimating migration risk through a mortality rate actuarial based approach the resultant probabilities will be the base for determining multi period risk neutral transition probability that allow pricing of risky debt in the trading and banking book

a coupled markov chain approach to credit risk modeling we propose a markov chain model for credit rating changes we do not use any distributional assumptions on the asset values of the rated companies but directly model the rating transitions process the parameters of the model are estimated by a maximum likelihood approach using historical rating transitions and heuristic global optimization techniques we benchmark the model against a glmm model in the context of bond portfolio risk management the proposed model yields stronger dependencies and higher risks than the glmm model as a result the risk optimal portfolios are more conservative than the decisions resulting from the benchmark model

trade credit for supply chain coordination abstract trade credit is a seller s short term loan to the buyer allowing the buyer to delay payment of an invoice it has been the largest source of working capital for a majority of business to business firms in the united states numerous theories have been proposed to explain trade credit mainly from finance perspectives it has also been an important issue in supply chain management surprisingly most literature in supply chain management has examined the retailer s stocking policies given a supplier s trade credit this paper attempts to shed light on trade credit from a supplier s perspective and presents it as a tool for supply chain coordination specifically we explicitly assume firms financial needs for inventory following a newsvendor framework we assume that the supplier grants trade credit and markdown allowance given the supplier s offer the retailer determines order quantity and the financing option for the inventory either trade credit or direct financing from a financial institution our result shows that the supplier s markdown allowance alone cannot fully coordinate the supply chain if the retailer employs direct financing positive financing costs call for trade credit in order to subsidize the retailer s costs of inventory financing using trade credit in addition to markdown allowance the supplier fully coordinates the retailer s decisions for the largest joint profit and extracts a greater portion of the maximized joint profit

the effects of estimation error on measures of portfolio credit risk abstract this paper uses monte carlo simulations to assess the impact of noisy input parameters on the accuracy of estimated portfolio credit risk assumptions about input quality are derived from the distribution of historical sample statistics commonly used in default risk modelling the resulting estimation error in the distribution of portfolio losses is considerable losses that are judged to occur with a probability of 0 3 may actually occur with a probability of 1 the paper also shows that estimation error leads to biases in value at risk estimates and significance levels of backtests the biases can be corrected by analysing predictive distributions which average over the unknown parameter values

consumption responses to a large shock to financial wealth evidence from italy we estimate marginal propensities to consume from wealth shocks for italian households early in the great recession large asset price shocks in 2007 2008 underpin instrumental variables a euro fall in risky financial wealth resulted in cuts in annual total non durable consumption of 8 5 9 5 5 5 7 cents we find small effects on food spending counterfactuals indicate financial wealth effects were relatively important for consumption falls in italy in 2007 08 the estimated effects are consistent with a simulated lifecycle model that captures the wealth shock also consistent with the model are findings of stronger wealth effects for agents who were pessimistic about stock returns

the domino effect of credit defaults test of asymmetric default correlations using realised default data using the research framework of a domino effect in firms we first make theoretical contributions by addressing several testable hypotheses regarding asymmetrical default correlations we then employ lucas s method to provide empirical evidence based on realised historical default data in the united states from 1992 to 2013 our empirical results are consistent with the following notions first default correlations increase with the time horizon second firms with low credit quality small size illiquidity and a high beta exhibit higher default correlations credit risk management without considering asymmetrical default correlations could underestimate portfolio risk due to default clustering

var and expected shortfall in portfolios of dependent credit risks conceptual and practical insights in the first part of this paper we address the non coherence of value at risk var as a risk measure in the context of portfolio credit risk and highlight some problems which follow from this theoretical deficiency in particular a realistic demonstration of the non subadditivity of var is given and the possibly nonsensical consequences of var based portfolio optimisation are shown the second part of the paper discusses var and expected shortfall estimation for large balanced credit portfolios all standard industry models creditmetrics kmv creditrisk are presented as bernoulli mixture models to facilitate their direct comparison for homogeneous groups it is shown that measures of tail risk for the loss distribution may be approximated in large portfolios by analysing the tail of the mixture distribution in the bernoulli representation an example is given showing that for portfolios of lower quality choice of model has some impact on measures of extreme risk 2002 elsevier science b v all rights reserved

sorting out risks using known apt factors arbitrage pricing theory apt differs from the capital asset pricing model capm in hypothesizing that actual and expected security returns are sensitive not to just one type of nondiversifiable risk i e beta or market risk but to a variety of different ypes of risk prior testing has shown the capm to be inferior to an apt model that incorporates unanticipated changes in five macroeconomic variables default risk the term structure of interest rates inflation or deflation the long run expected growth rate of profits for the economy and residual market risk it is possible to estimate the sensitivities of individual securities or portfolios to these five risk factors such measurements allow one to explore variations in sensitivities to different types of risk across both equity market sectors and industries the resulting risk exposure profiles do not depend on any particular market index apt risk profiles may be used for either active or passive portfolio management passive managers wishing to reduce their portfolios systematic risk characteristics might consider a technique termed risk sterilization here assets with different risk profiles are combined so as to negate or sterilize exposure to selected riskfactors alternatively active managers can attempt to achieve excess returns by constructing portfolios in accordance with their forecasts of risk factor realizations

bank ratings what determines their quality this paper examines the quality of credit ratings assigned to banks by the three largest rating agencies we interpret credit ratings as relative assessments of creditworthiness and define a new ordinal metric of rating error based on banks expected default frequencies our results suggest that on average large banks receive more positive bank ratings particularly from the agency to which the bank provides substantial securitization business these competitive distortions are economically significant and contribute to perpetuate the existence of too big to fail banks we also show that overall differential risk weights recommended by the basel accords for investment grade banks bear no significant relationship to empirical default probabilities harald hau sam langfield and david marques ibanez

risk based capital requirements for mortgage loans abstract we contribute to the debate over the reform of the basel accord by developing risk based capital requirements for mortgage loans held in portfolio by financial intermediaries our approach employs simulation of both economic variables that affect default incidence and conditional loss probability distributions results indicate that appropriate capital charges for credit risk vary substantially with loan characteristics and portfolio geographic diversification hence rules that offer little risk differentiation including the current basel i regime and standardized approach proposed in basel ii result in significant divergence between regulatory and economic capital these results highlight the incentive problems inherent in simplified methods of capital regulation

credit risk models and agricultural lending credit risk models are developed and used to estimate capital requirements for agricultural lenders under the new basel capital accord the study uses credit value at risk methods to calculate probability of default loss given default and expected and unexpected losses two applied models creditmetrics and moody s kmv are estimated using farm financial data the results show that the necessary capital for agricultural lenders under the new basel accord varies substantially depending on the riskiness and granularity of the portfolio

counterparty risk and the pricing of defaultable securities motivated by recent financial crises in east asia and the united states where the downfall of a small number of firms had an economy wide impact this paper generalizes existing reduced form models to include default intensities dependent on the default of a counterparty in this model firms have correlated defaults due not only to an exposure to common risk factors but also to firm specific risks that are termed counterparty risks numerical examples illustrate the effect of counterparty risk on the pricing of defaultable bonds and credit derivatives such as default swaps it has been well documented in moody s reports on historical default rates of corporate bond issuers that the number of defaults the number of credit rating downgrades and credit spreads are all strongly correlated with the business cycle this has motivated reduced form models such as duffie and singleton 1999 and lando 1994 1998 which assume that the intensity of default is a stochastic process that derives its randomness from a set of state variables such as the short term interest rate this approach has the convenient features that conditioning on the state variables defaults become independent events and default correlation arises due to the common inf luence of these state variables on the other hand a default intensity that depends linearly on a set of smoothly varying macroeconomic variables is unlikely to account for the clustering of defaults around an economic recession this is evident from a casual inspection of the exhibits in the latest moody s report see keenan 2000 within the usual affine framework one can model the state variables as jump diffusions see duffie pan and single

shocks stocks and socks smoothing consumption over a temporary income loss we investigate how households in temporarily straitened circumstances due to an unemploy ment spell cut back on expenditures and how they spend marginal dollars of unemployment insurance ui benefit our theoretical and empirical analyses emphasize the importance of allowing for the fact that households buy durable as well as non durable goods the theoretical analysis shows that in the short run households can cut back significantly on total expenditures without a significant fall in welfare if they concentrate their budget reductions on durables we then present an empirical analysis based on a canadian survey of workers who experienced a job separation exploiting changes in the unemployment insurance system over our sample period we show that cuts in ui benefits lead to reductions in total expenditure with a stronger impact on clothing than on food expenditures our empirical strategy allows that these expenditures may be non separable from employment status the effects we find are particularly strong for households with no liquid assets before the spell started these qualitative findings are in precise agreement with the theoretical predictions jel d11 d12 d91 j65 2009 by the european economic association

house price shocks negative equity and household consumption in the united kingdom we examine the impact of unanticipated housing capital gains on consumption behavior using data from the british household panel survey and county level house price data we condition the models on household financial expectations and on household real financial capital gains imputed from the family resources survey we find a marginal propensity to consume out of unanticipated shocks to housing wealth of 0 01 omitting the measure of financial expectations biases the results upward we find little evidence of heterogeneity in responses of young and old homeowners but differences between owners and renters we also find asymmetric behavior between house price rises and falls and a disproportionate impact on saving if the household had negative housing equity at the start of the period jel d91 e21 r31 c 2010 by the european economic association

stock market wealth and consumption this paper explores the link between changes in the aggregate value of corporate stock and changes in consumer spending it presents data on the distribution of corporate stock ownership based on the 1998 survey of consumer finances it also uses time series evidence on the comovement of stock market wealth and various categories of consumer spending to calibrate the wealth effect it concludes that in the year after a change in stock market values consumer spending is likely to rise by between one and two cents for each dollar increase in the value of corporate stock

a multi factor credit migration model for sovereign and corporate debts abstract this paper develops a multi factor markov chain model for rating migrations and credit spreads that is applicable to both sovereign and corporate debts the model s central feature is to allow transition matrices to be time varying and driven by rating specific latent variables which encompass economic factors like the business cycle there are three main contributions first the model incorporates well documented empirical properties of transition matrices such as their dependence on business credit cycles and it also allows for inter rating variations in credit quality changes second instead of focusing solely on empirical modeling of rating transitions the paper also shows how the empirical model can be implemented for actual valuations third the estimation and calibration procedures are easy to follow and implement

is there a retirement savings puzzle in this paper we ask whether households are saving enough for their retirement we use data on income expenditure and expenditure components to analyse patterns of behaviour at and around the time of retirement for successive date of birth cohorts we compare periods of unemployment to periods of retirement and separate expenditures into categories reflecting work related expenditures basic necessities and other goods we find that income typically falls by more at unemployment than retirement but the reverse is true for expenditure we observe falls in expenditure at retirement for all expenditure categories using a stochastic life cycle model including mortality rates we assess the anticipated impact of retirement on consumption against that of unemployment the inter relationship between goods and leisure explains a large part of the persistent fall in expenditure at retirement we argue that the only way in which the life cycle hypothesis could be reconciled with the remaining unanticipated dip in consumption would be with the systematic arrival of unexpected adverse information at the time of retirement