ultimate recovery mixtures abstract we propose a relatively simple accurate and flexible approach to forecasting the distribution of defaulted debt recovery outcomes our approach is based on mixtures of gaussian distributions explicitly conditioned on borrower characteristics debt instrument characteristics and credit conditions at the time of default using moody s ultimate recovery database we show that our mixture specification yields more accurate forecasts of ultimate recoveries on portfolios of defaulted loans and bonds on an out of sample basis than popular regression based estimates further the economically interpretable outputs of our model provide a richer characterization of how conditioning variables affect recovery outcomes than competing approaches the latter benefit is of particular importance in understanding shifts in the relative likelihood of extreme recovery outcomes that tend to be realized more frequently than observations near the distributional mean

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

capital requirements under the credit risk based framework abstract this work aims to study the hypothesis of lower capitalization of banks under the risk based rules introduced in basel ii in this sense an assessment of the impact of these rules on the capital requirements for non financial firms credit risk is performed a comparison with basel i is presented and intervals of variation for the risk drivers such that capital requirements exceed the ones under basel i are established data for a european country supports the hypothesis of a smaller capitalization of banks under the risk based framework as far as credit risk in concerned

forecasting bank loans loss given default abstract with the advent of the new basel capital accord banking organizations are invited to estimate credit risk capital requirements using an internal ratings based approach in order to be compliant with this approach institutions must estimate the loss given default the fraction of the credit exposure that is lost if the borrower defaults this study evaluates the ability of a parametric fractional response regression and a nonparametric regression tree model to forecast bank loan credit losses the out of sample predictive ability of these models is evaluated at several recovery horizons after the default event the out of time predictive ability is also estimated for a recovery horizon of 1 year the performance of the models is benchmarked against recovery estimates given by historical averages the results suggest that regression trees are an interesting alternative to parametric models in modeling and forecasting loss given default

monetary policy and commodity money equilibria abstract commodity monies are thought to be desirable because of their ease of implementation and their generation of stable prices this paper presents an investigation into these properties and a derivation of the restrictions commodity monies place on monetary policy it is found that for commodity money systems to be feasible monetary policy must follow a feedback rule which is a function of the growth rates for all asset stocks and in general a reduction in economic welfare accrues to agents in a commodity money economy moreover the restrictions implied by a commodity money system are often inconsistent with existence of equilibrium

support vector regression for loss given default modelling abstract loss given default modelling has become crucially important for banks due to the requirement that they comply with the basel accords and to their internal computations of economic capital in this paper support vector regression svr techniques are applied to predict loss given default of corporate bonds where improvements are proposed to increase prediction accuracy by modifying the svr algorithm to account for heterogeneity of bond seniorities we compare the predictions from svr techniques with thirteen other algorithms our paper has three important results first at an aggregated level the proposed improved versions of support vector regression techniques outperform other methods significantly second at a segmented level by bond seniority least square support vector regression demonstrates significantly better predictive abilities compared with the other statistical models third standard transformations of loss given default do not improve prediction accuracy overall our empirical results show that support vector regression techniques are a promising technique for banks to use to predict loss given default

joint effect of financial fragility and macroeconomic shocks on bank loan losses evidence from europe abstract a reduced form model including nonlinearities is estimated from pooled data from nine european countries during 1982 2004 to show the effects of macroeconomic shocks and financial fragility on bank loan losses the main ingredients of the model are unanticipated output and interest rate shocks estimated from published macroeconomic and naive forecasts the model fits the data well capturing the extremely high levels of loan losses witnessed in different financial crises

loss functions for loss given default model comparison abstract we propose a new approach for comparing loss given default lgd models which is based on loss functions defined in terms of regulatory capital charge our comparison method improves the banks ability to absorb their unexpected credit losses by penalizing more heavily lgd forecast errors made on credits associated with high exposure and long maturity we also introduce asymmetric loss functions that only penalize the lgd forecast errors that lead to underestimate the regulatory capital we show theoretically that our approach ranks models differently compared to the traditional approach which only focuses on lgd forecast errors we apply our methodology to six competing lgd models using a sample of almost 10 000 defaulted credit and leasing contracts provided by an international bank our empirical findings clearly show that models rankings based on capital charge losses differ from those based on the lgd loss functions currently used by regulators banks and academics

the determinants of bank loan recovery rates in good times and bad new evidence abstract we find that factors explaining bank loan recovery rates differ depending on the state of an underlying credit cycle our modelling approach incorporates a two state markov switching mechanism to capture underlying economic conditions this latent credit cycle variable helps to explain differences in observed recovery rates over time using us bank default loan data from moody s ultimate recovery database and covering the pre and post global financial crisis gfc period the paper develops and implements a dynamic model for bank loan recovery rates we accommodate the distinctive empirical features of the recovery rate data while incorporating a large number of possible determinants we find that certain loan specific and other variables hold different explanatory power with respect to recovery rates in good versus bad times in the credit cycle i e depending on underlying credit market conditions our findings demonstrate the importance of accounting for counter cyclical expected recovery rates when determining capital retention levels

systematic effects among loss given defaults and their implications on downturn estimation abstract banks are obliged to provide downturn estimates for loss given defaults lgds in the internal ratings based approach while downturn conditions are characterized by systematically higher lgds it is unclear which factors may best capture these conditions as lgds depend on recovery payments which are collected during varying economic conditions in the resolution process it is challenging to identify suitable economic variables using a bayesian finite mixture model we adapt random effects to measure economic conditions and to generate downturn estimates we find that systematic effects vary among regions i e the us and europe and strongly deviate from the economic cycle our approach offers straightforward supportive tools for decision makers risk managers are enabled to select their individual margin of conservatism based on their portfolios while regulators might set a lower bound to guarantee conservatism in comparison to other approaches our proposal appears to be conservative enough during downturn conditions and inhibits over conservatism

from central planning to market economy some microeconomic issues the economies that we are concerned with here fall somewhere between the two extremes of a very traditional centrally planned economy and a wellestablished market type economy recent and on going reforms are moving hungary and poland and in due course probably some of the other eastern european countries too to a position somewhat closer to the market economy end of the spectrum though with important qualifications that we come to later in the light of such reform intentions it is important not only to consider the particular measures that have been taken or are envisaged but to examine them within a framework that helps to throw some light on the most effective sequencing priority for economic reform since some reforms will in the short term be accompanied by highly unpopular outcomes for certain groups of the population e g high unemployment for a time increases in food and other consumer goods prices and so on it is clearly also important to examine future reforms in the context of the political social environment within which they must take place this necessarily includes taking account of each country s current economic situation partly because it is one of the factors creating pressure for economic reforms partly because present difficulties might constrain what reforms are actually feasible in this paper much of the more detailed discussion concerns hungary largely because it is the economy which has already moved furthest towards a market type economy it therefore sets out the path which other eastern european countries are likely to follow very soon however section 2 outlines some general issues of microeconomic reform while sections 3 and 4 then deal with some specific topics development of competition privatisation the position of large enterprises in the hungarian context on this basis section 5 widens the discussion again to consider the question of transition to a market economy section 6 provides some concluding observations

hungary in transition to a market economy hungary began its transition to a market economy as long ago as 1968 with the adoption of the new economic mechanism when detailed central planning was abandoned and the economy was regulated by means of financial and economic levers hare radice and swain 1981 however after a period of re centralization in the 1970s and further marketoriented reforms during the 1980s it became evident that the country was still far from achieving a successful transition nevertheless hungary s attempts at economic reform over the last 20 years are remarkably instructive both for the present government s program of transition and for other eastern european nations for some general discussion of reform attempts and approaches see hare 1987 moreover many of the measures now being implemented in hungary were prepared and in many cases began to be implemented prior to the country s political transformation hence there is much stronger continuity in the hungarian reforms than one can find elsewhere in the region

the delivery option in credit default swaps abstract under standard assumptions the reduced form credit risk model is not capable of accurately pricing the two fundamental credit risk instruments bonds and credit default swaps cds simultaneously using a data set of euro denominated corporate bonds and cds our paper quantifies this mispricing by calibrating such a model to bond data and subsequently using it to price cds resulting in model cds spreads up to 50 lower on average than observed in the market an extended model is presented which includes the delivery option implicit in cds contracts emerging since a basket of bonds is deliverable in default by using a constant recovery rate standard models assume equal recoveries for all bonds and hence zero value for the delivery option contradicting this common assumption case studies of chapter 11 filings presented in the paper show that corporate bonds do not necessarily trade at equal levels following default our extension models the implied expected recovery rate of the cheapest to deliver bond and applied to data largely eliminates the mispricing calibrated recovery values lie between 8 and 47 for different obligors exhibiting strong variation among rating classes and industries a cross sectional analysis reveals that the implied recovery parameter depends on proxies for the delivery option primarily the number of available bonds and bond pricing errors no evidence is found for a direct influence of the bid ask spread notional amount coupon or rating used as proxies for bond market liquidity

rules commitment and the search for stable money a review essay political economists have always criticized existing monetary institutions and struggled to articulate a vision of an ideal monetary system the volume under review the search for stable money essays on monetary reform edited by james a dorn and anna j schwartz university of chicago press 1987 stands firmly in this tradition it addresses the shortcomings of modern monetary institutions and debates the merits of various alternative arrangements the volume consists of nineteen essays and a number of short comments among the contributors are three nobel prize winners buchanan friedman and hayekthough buchanan simply comments on bernholz generally speaking the essayists disapprove of the virtually unlimited discretion invested in the federal reserve they argue that discretion leads to unnecessarily high and variable rates of inflation the essayists also agree that the solution ought to take the form of a change in the political rules which would have the effect of limiting government control over the monetary system beyond this there is no consensus the contributors consider money growth rules the gold standard a proposal for a compensated dollar and competitive currency systems but often find one another s proposals as objectionable as the status quo the essays in this volume are about five years old with the exception of the introductory piece by james dorn each was originally published elsewhere most originally appeared in the cato journal in 1983 sometimes the age of the essays shows careful analysis of federal reserve policy in 1981 82 was no doubt of topical interest when the essays were written but is less so now

price discovery and trade fragmentation in a multi market environment evidence from the mts system this paper proposes new metrics for the process of price discovery on the main electronic trading platform for euro denominated government securities analysing price data on daily transactions for 107 bonds over a period of twenty seven months we find a greater degree of price leadership of the dominant market when our measures as opposed to the traditional price discovery metrics are used we also present unambiguous evidence that a market s contribution to price discovery is crucially affected by the level of trading activity the implications of these empirical findings are discussed in the light of the debate about the possible restructuring of the regulatory framework for the treasury bond market in europe

the assessment microeconomics of transition in eastern europe the dramatic political events of 1989 and 1990 when almost all the communist governments of eastern europe collapsed and new democratic governments were elected into office gave rise to a brief spell of euphoria the dead or dying hand of communism was lifted from the region and a future of capitalist abundance was supposedly as sured this naive but perfectly understandable euphoria was quickly dispelled by the grim economic reality facing the new governments al though nearly everywhere there was a commit ment more or less strong to bring about a transition to a market type economy a transition typically requiring stabilization extensive liberalization and privatization there was far less agreement on the speed sequencing and precise modalities of the process at the same time in certain countries much needed reform programmes could neither be agreed nor implemented effectively because of political disputes over the very nature and existence of the states concerned table 1 summarizes the economic and political situation in the whole re gion as of summer 1991

economic reform in eastern europe abstract since the early 1960s reforms in the traditional centralized model of a planned economy have been debated in most of eastern europe reforms have been confined to cautious ones seeking to improve central planning but in hungary and to a small degree elsewhere more radical reforms have taken root these retain elements of planning but also introduce the institutions and policies needed to support a more active market orientation for the economy such reforms encounter limits when they begin to threaten or call into question established political structures and it is an open question how much further reforms can proceed in hungary without political change

a computational approach to pricing a bank credit line abstract using trended brownian motion to characterize borrower cash needs over time we are able to derive a probability density function for the time to depletion of a bank credit line as well as the likelihoods for the time to exhausting the sources of liquidity that fund the loan armed with these analytic results we solve for the credit line mark up rate and the configuration of stored liquidity that maximizes the bank s intertemporal expected profits from the loan the optimality conditions produce a system of integral differential equations whose solutions we then simulate over a host of scenarios

correlated default and financial intermediation financial intermediation naturally arises when knowledge about the aggregate state is valuable for managing investments and lenders cannot easily observe the aggregate state i show this using a costly enforcement model in which lenders need ex post incentives to enforce payments from defaulted loans and borrowers payoffs are correlated when projects have correlated outcomes learning the state of one project via enforcement provides information about the states of other projects a large correlated portfolio provides ex post incentives for enforcement as a result intermediation dominates direct lending intermediaries are financed with risk free deposits earn positive profits and hold systemic default risk

recovery rates default probabilities and the credit cycle in recessions the number of defaulting firms rises on top of this the average amount recovered on the bonds of defaulting firms tends to decrease this paper proposes an econometric model in which this joint time variation in default rates and recovery rate distributions is driven by an unobserved markov chain which we interpret as the credit cycle this model is shown to fit better than models in which this joint time variation is driven by observed macroeconomic variables we use the model to quantitatively assess the importance of allowing for systematic time variation in recovery rates which is often ignored in risk management and pricing models

loss given default for leasing parametric and nonparametric estimations abstract this study employs a dataset from three german leasing companies with 14 322 defaulted leasing contracts to analyze different approaches to estimating the loss given default lgd using the historical average lgd and simple ols regression as benchmarks we compare hybrid finite mixture models fmms model trees and regression trees and we calculate the mean absolute error root mean squared error and the theil inequality coefficient the relative estimation accuracy of the methods depends among other things on the number of observations and whether in sample or out of sample estimations are considered the latter is decisive for proper risk management and is required for regulatory purposes fmms aim to reproduce the distribution of realized lgds and therefore perform best with respect to in sample estimations but they show poor performance with respect to out of sample estimations model trees by contrast are more robust and outperform all other methods if the sample size is sufficiently large

effects of debt collection practices on loss given default abstract in this article we propose an lgd model that is solely based on legal and internal debt collection actions our model is supported by empirical tests in which it performs better than a usual firm specific model this result is noteworthy when we recall that the model has only binary variables that indicate whether an action was taken our model can be applied to update the lgd of distressed firms in a timely manner reflecting the actions taken during the debt collection period it also can be used to assess the effect of a recovery action and to determine whether to apply an action to certain types of debt