maximum likelihood estimation of first passage structural credit risk models correcting for the survivorship bias abstract the survivorship bias in credit risk modeling is the bias that results in parameter estimates when the survival of a company is ignored we study the statistical properties of the maximum likelihood estimator mle accounting for survivorship bias for models based on the first passage of the geometric brownian motion we find that if we neglect the survivorship bias then the drift has a positive bias that may not disappear asymptotically we show that correcting the survivorship bias by conditioning on survival in the likelihood function underestimates the drift therefore we propose a bias correction method for non iid samples that is first order unbiased and second order efficient the economic impact of neglecting or miscorrecting for the survivorship bias is studied empirically based on a sample of more than 13 000 companies over the period 1980 through 2016 inclusive our results point to the important risk of misclassifying a company as solvent or insolvent due to biases in the estimates

what drives bank securitisation the spanish experience abstract this paper analyses the reasons why spanish banks securitised in the period 2000 2007 on such a large scale that spain has become the european country with the second largest issuance volume after the uk the results obtained by applying a logistic regression model to a sample of 408 observations indicate that liquidity and the search for improved performance are the decisive factors in securitisation we find no evidence to support hypotheses regarding credit risk transfer and regulatory capital arbitrage our study also presents a more detailed analysis that differentiates between asset and liability securitisation programmes

climate change policy what do the models tell us very little a plethora of integrated assessment models iams have been constructed and used to estimate the social cost of carbon scc and evaluate alternative abatement policies these models have crucial flaws that make them close to useless as tools for policy analysis certain inputs e g the discount rate are arbitrary but have huge effects on the scc estimates the models produce the models descriptions of the impact of climate change are completely ad hoc with no theoretical or empirical foundation and the models can tell us nothing about the most important driver of the scc the possibility of a catastrophic climate outcome iam based analyses of climate policy create a perception of knowledge and precision but that perception is illusory and misleading jel c51 q54 q58

valuing risky fixed rate debt an extension this paper develops a corporate bond valuation model that takes into account both early default and interest rate risk it corrects a defect of recent contributions where pricing equations do not assure that the payment to bondholders upon bankruptcy is no greater than firm value the bankruptcy triggering mechanism is directly related to the payoff received by bondholders when early bankruptcy is forced upon the firm more specifically the default barrier is defined simply as a fixed quantity discounted at the riskless rate up to the maturity date of the risky corporate bond as soon as this threshold is crossed bondholders receive an exogenously specified fraction ofthe remaining assets deviations from the absolute priority rule also are captured because it accounts for gaussian interest rate uncertainty default risk and deviations from the absolute priority rule this model is capable of producing quite diverse shapes for the term structure of yield spreads

interfuel competition in the industrial sector of seven oecd countries abstract the purpose of this article is to present an analysis of interfuel substitution in the industrial sector of seven major oecd countries the united states canada japan germany france the united kingdom and italy over the 1960 1993 period translog models are used to provide estimates of price elasticities from annual data for each country results outline the weakness of price elasticities and changes in behaviour over the last 35 years and show evidence of asymmetric effects since the collapse of oil prices in 1986 substitution has stopped industrial energy demand and oil consumption have stagnated interfuel substitution is widely induced by events other than relative price changes energy policy political and institutional constraints changes in economic activity characteristics within individual country sectors

private equity and regulatory capital regulatory capital requirements for european banks have been put forward in the basel ii capital framework and subsequently in the capital requirements directive crd of the eu we provide a detailed discussion of the capital requirements for private equity investments under different approaches for the internal model approach we present a structural model that we calibrate to a proprietary dataset we modify the standard merton structural model to make it applicable in practice and to capture stylized facts of private equity investments we also implement the early default feature with a fast simulation algorithm our results support capital requirements lower than in basel ii but not as low as in crd thereby giving adverse incentives to banks for using advanced risk models a sensitivity analysis shows that this finding is robust to parameter uncertainty and stress scenarios

a barrier option framework for corporate security valuation abstract this paper proposes a framework for corporate security valuation based on path dependent barrier option models instead of the commonly used path independent approach we argue that path dependency is an intrinsic and fundamental characteristic of corporate securities because equity can be knocked out whenever a legally binding barrier is breached a direct implication of this framework is that equity will be priced as a down and out call option we provide empirical validation of the barrier model by showing that implied barriers are statistically and economically significant for a large cross section of industrial firms additional robustness tests confirm that barriers remain significant over a wide range of input variable estimates and finally we apply the barrier option framework to bankruptcy prediction and find that implied failure probabilities dominate z scores in most cases

how does equity capital cost affect bank performance during a financial crisis this article theoretically examines how equity capital cost affects return performance and safety of a bank and how this effect varies across a financial crisis comparing to a normal time when the bank manager s performance reveals the like of higher equity return and the dislike of higher equity risk we derive two main results first an increase in the bank s equity capital cost from an increase of the interest rate of the federal funds results in a reduced loan risk taking at an increased optimal bank interest margin implying better bank performance second by ignoring the dislike we find that the better performance is reinforced during a financial crisis but is reduced during a normal time financial crises and the dislike preference as such contribute a relatively low return and the stability of banking activities

a social cost of carbon for almost every country this paper uses imputed national climate change impact functions to estimate national social costs of carbon which are largest in poor countries with large populations the national social costs of carbon of faster growing economies are less sensitive to the pure rate of time preference and more sensitive to the rate of risk aversion the pattern of national social costs of carbon is not sensitive to the assumed impact function climate sensitivity and scenario although the global social cost of carbon is income convergence raises the national social costs of carbon of poorer countries and lowers them for richer countries both global and national social costs of carbon are most sensitive to the income elasticity of climate change impacts a parameter about which we know little

analysis of the factors influencing energy consumption in industry a revised method abstract looking at the trends of electricity and fuel consumption in industry it is often desirable to find out how much of the change in energy consumption is due to changes in the main factors of influence ie production quantity production structure and specific consumption this paper introduces a method to determine the role of these factors in an unambiguous manner for illustration a very simple numerical example is given together with a comparison to the results obtained by the method which has been commonly used 1

the linkage between life insurer spread behaviour and credit swap transaction policyholder protection analysis the paper develops a contingent claim model to evaluate the equity of a life insurer when the insurer could act as a protection buyer or a protection seller in a credit swap transaction market the

why the far distant future should be discounted at its lowest possible rate abstract a critical feature of the distant future is currently unresolvable uncertainty about what will then be the appropriate rate of return on capital to use for discounting this paper shows that there is a well defined sense in which the lowest possible interest rate should be used for discounting the far distant future part of any investment project some implications are discussed for evaluating long term environmental projects or activities like measures to mitigate the possible effects of global climate change

the impact of conglomeration on the option value of equity abstract using contingent claims analysis i quantify the effect of risk reducing corporate diversification on the value of equity as a call option on firm assets the impact of conglomeration on firm risk is heavily conditioned on firm size in contrast to small firms the risk of large firms does not decline with increasing conglomeration accounting for this effect the expected equity discount is much lower than commonly assumed and can even turn into a premium if the path dependency of equity is incorporated my results stand in direct contrast to those of mansi and reeb 2002 and caution against using asset substitution as a qualitative argument for explaining economy wide value phenomena

model risk and capital reserves abstract we propose a procedure to take model risk into account in the computation of capital reserves this addresses the need to make the allocation of capital reserves to positions in given markets dependent on the extent to which reliable models are available the proposed procedure can be used in combination with any of the standard risk measures such as value at risk and expected shortfall we assume that models are obtained by usual econometric methods which allows us to distinguish between estimation risk and misspecification risk we discuss an additional source of risk which we refer to as identification risk by way of illustration we carry out calculations for equity and fx data sets in both markets estimation risk and misspecification risk together explain about half of the multiplication factors employed by the bank for international settlements bis

the structure of economic modeling of the potential impacts of climate change grafting gross underestimation of risk onto already narrow science models scientists describe the scale of the risks from unmanaged climate change as potentially immense however the scientific models because they omit key factors that are hard to capture precisely appear to substantially underestimate these risks many economic models add further gross underassessment of risk because the assumptions built into the economic modeling on growth damages and risks come close to assuming directly that the impacts and costs will be modest and close to excluding the possibility of catastrophic outcomes a new generation of models is needed in all three of climate science impact and economics with a still stronger focus on lives and livelihoods including the risks of large scale migration and conflicts

structural change and technology choice energy use in mexican manufacturing industry 1970 1981 abstract this paper analyses industrial energy use in a country that has experienced falling instead of rising energy prices mexico subsidizes domestic energy consumption with the avowed purpose of stimulating industrialization methods are developed to distinguish the effects of technology choice from the effects of changing industrial structure and are then used to analyse the increased energy intensity of manufacturing industry 1970 1981 the increase is found to depend entirely on the adoption of more energy using technology whereas the changes in output structure have had little or no effect there has been a slight bias in favour of the less energy intensive sectors

do people care about future generations derived preferences from happiness data the main approaches for computing very long term discount rates revealed and stated preferences have limitations we overcome previous shortcomings using derived preferences i e we retrieve information on very long term time preferences from happiness data and people s expectations about the living conditions of future generations we account for possible endogeneity between expectations about the future and current well being using 2sls we find that negative positive expectations about future generations have a very large negative positive impact on subjective well being this finding suggests that the very long term discount rate is lower than implied by most traditional economic analyses

estimation of correlations in portfolio credit risk models based on noisy security prices portfolio credit risk models are very often constructed with correlation matrices serving as proxies for interrelations in the creditworthiness of each company in addition to the size of the matrix estimation of correlation is also complicated by the fact that defaults are rare and credit sensitive securities such as stocks bonds and credit default swaps cds are noisy therefore we present in this paper an estimation approach based on credit sensitive instruments that accounts for noise and is highly parallelizable the latter being a very important feature for large portfolios in finance a simulation study shows that the method is reliable and has better statistical properties when benchmarked against other correlation estimators in an empirical study based on the cds premiums and stock prices of 225 firms listed on the cdx north american indices we analyze the correlations computed using numerous approaches overall we find that ignoring noise severely underestimates correlations whereas equity correlation is poorly related to the best correlation estimates inferred from the cds market

factors influencing changes in energy consumption the case of italy 1975 85 abstract during the last years several authors have been studying the main factors influencing changes in energy consumption ie production volume production structure and energy intensity thus a number of methods to quantify these factors have been suggested in this paper one of those methods is partially modified and is applied to the italian situation for the period 1975 85 in order to try to point out the role played by the various factors which have caused changes in energy consumption in italy

discounting the distant future how much do uncertain rates increase valuations abstract we demonstrate that when the future path of the discount rate is uncertain and highly correlated the distant future should be discounted at significantly lower rates than suggested by the current rate we then use two centuries of us interest rate data to quantify this effect using both random walk and mean reverting models we compute the certainty equivalent rate that summarizes the effect of uncertainty and measures the appropriate forward rate of discount in the future under the random walk model we find that the certainty equivalent rate falls continuously from 4 to 2 after 100 years 1 after 200 years and 0 5 after 300 years at horizons of 400 years the discounted value increases by a factor of over 40 000 relative to conventional discounting applied to climate change mitigation we find that incorporating discount rate uncertainty almost doubles the expected present value of mitigation benefits

life insurer performance under the bailout of distressed asset purchases abstractthe paper develops a structure break contingent claim model to examine how government bailout affects a life insurer s performance policyholder protection and insurer survival the distre

venture capital funds flow performance relationship and performance persistence this paper finds that venture capital funds that are expected to be backed by more skilled investors show no performance persistence but a significant flow performance relationship in contrast funds that are expected to be backed by less skilled investors show performance predictability and have a non significant flow performance relationship these results suggest that only skilled investors use all available information to adjust their capital allocation and as a result eliminate performance predictability as argued theoretically by berk and green 2004 results also show that kaplan and schoar 2005 overstate the persistence in fund performance by not using an ex ante measure of the performance of earlier funds whether or not an ex ante measure is used however the persistence is largely due to unsophisticated investors when investors are sophisticated the performance of earlier funds sequence and fund size do not help predict the performance of the focal fund

assessing bank equity risk under legacy loan program we study the effects of purchasing distressed loan on bank equity risk under the legacy loan program llp in which the government is in partnership with private investors the bank may refuse llp when its knock out value is too low when the bank decides to participate in the llp the participation of a private investor generates a decrease in bank interest margin and an increase in equity risk but the knock out value with the llp assistance generates an increase in bank interest margin and a decrease in equity risk our results suggest that the success of llp depends critically on the willingness of a weak bank to participate in it however the participation of a private investor in llp does not decrease the weak bank s equity risk but poses instability to the banking system

term structures of credit spreads with incomplete accounting information we study the implications of imperfect information for term structures of credit spreads on corporate bonds we suppose that bond investors cannot observe the issuer s assets directly and receive instead only periodic and imperfect accounting reports for a setting in which the assets of the firm are a geometric brownian motion until informed equityholders optimally liquidate we derive the conditional distribution of the assets given accounting data and survivorship contrary to the perfect information case there exists a default arrival intensity process that intensity is calculated in terms of the conditional distribution of assets credit yield spreads are characterized in terms of accounting information generalizations are provided

the effect of leverage on the cost of capital of us buyouts abstract this paper addresses the problem to assess the effect of leverage on the cost of capital for buyout performance analyses it draws on a unique and proprietary set of data on 133 us buyouts between 1984 and 2004 for each of them we determine a public market equivalent that matches it with respect to its timing and its systematic risk we show that under realistic mimicking conditions the average cost of capital is below the commonly used benchmark s p 500 thereby we control for two important aspects for the risks taken by lenders in the buyout transactions which affects the sponsors risks and for the corresponding cost of debt which lowers the return of the public market equivalent only with borrowing and lending at the risk free rate is the average cost of capital close to the average index return this finding is particularly important as existing literature on that topic tends to rely on benchmarks without a proper risk adjustment

electricity consumption electricity intensity and industrial structure abstract this paper describes an analysis of recent trends in industrial output and electricity consumption carried out at the electricity council the analysis examines the significance of changes in industrial structure and in the intensity of electricity use within major industries using a simple arithmetical procedure the conclusion reached is that such factors have in recent years had a major influence on trends in industrial electricity consumption the importance of these factors explains why simple econometric models which describe industrial electricity sales as a function of total industrial output have proved unsatisfactory for forecasting purposes this conclusion underlines the need to use a disaggregated approach to electricity forecasting an approach which the electricity industry has used increasingly

government bailouts and default risks of a duopoly strong bank versus weak bank a duopolistic loan market includes a strong bank without the problem of early closure that opts out of government bailouts and a weak bank with this problem that participates in the bailout programmes of distressed loan purchases and direct equity injections a direct implication of our framework is that the strong bank s equity will be priced as a standard call option while the weak bank s equity will be priced as a down and out call option we find that an increase in either bailout i e distressed loan purchases and direct equity injections directly decreases the weak bank s default risk but indirectly increases the strong bank s default risk accordingly either bailout contributes to banking stability since the indirect positive effect insufficiently offsets the direct negative effect giving an overall negative response of default risks to an increase in either bailout higher competition by shifting to quasi competition from collusion increases banking stability under either bailout our analysi

the structure of the climate debate first best climate policy is a uniform carbon tax which gradually rises over time civil servants have complicated climate policy to expand bureaucracies politicians to create rents environmentalists have exaggerated climate change to gain influence other activists have joined the climate bandwagon opponents to climate policy have attacked the weaknesses in climate research the climate debate is convoluted and polarized as a result and climate policy complex climate policy should become easier and more rational as the paris agreement has shifted climate policy back towards national governments changing political priorities austerity and a maturing bureaucracy should lead to a more constructive climate debate

the maturity structure of corporate debt we provide an empirical examination of the determinants of corporate debt maturity our evidence offers strong support for the contracting cost hypothesis firms that have few growth options are large or are regulated have more long term debt in their capital structure we find little evidence that firms use the maturity structure of their debt to signal information to the market the evidence is consistent however with the hypothesis that firms with larger information asymmetries issue more short term debt we find no evidence that taxes affect debt maturity

the priority structure of corporate liabilities most discussions of corporate capital structure effectively assume that all debt is the same yet debt differs by maturity covenant restrictions conversion rights call provisions and priority here we examine priority structure across a sample of 4995 compustat industrial firms from 1981 to 1991 we analyze the variation in the use of capital leases secured debt ordinary debt subordinated debt and preferred stock both as a fraction of the firm s market value and as a fraction of total fixed claims our evidence provides consistent support for contracting cost hypotheses mixed support for tax hypotheses and little support for the signaling hypothesis

on not revisiting official discount rates institutional inertia and the social cost of carbon within the executive branch important decisions result from both substantive judgments and institutional constraints the constraints take the form of three sets of costs decision costs opportunity costs and political costs in exploring the workings of government economists and economically oriented law professors have placed far too much emphasis on the role of interest groups and far too little emphasis on a far larger set of institutional constraints of which interest group activity is at most one part because of those constraints it can be costly and difficult to change existing policies especially when such changes typically require a consensus among diverse people who may have strong views and who have many demands on their time for public officials a degree of institutional inertia is often a product of a considered analysis of the full set of costs and benefits both decision costs and error costs must be taken into account with respect to discount rates in the domain of regulation the central governing document is office of management and budget omb circular a 4 issued in 2003 omb 2003 circular a 4 was produced by officials within the executive branch coming from diverse parts of the federal government both political appointees and career officials played a role the council of economic advisers and the office of information and regulatory affairs oira were particularly important an initial version was presented to the public for comments and also subjected to peer review omb circular a 4