a model of credit risk optimal policies and asset prices this article studies an economy with borrowers firms or individuals under costly default borrowers defaulting under adverse economic conditions may despite incurring default costs emerge as wealthier than nonborrowers asset substitution is generally not pronounced although a larger risk exposure by borrowers may also occur and then binary options emerge as useful credit derivatives the asset value dynamics are endogenously determined and shown to exhibit stochastic mean and volatility in contrast to many credit risk models in equilibrium the market level is increased decreased in economic downturns upturns by the presence of credit risk

credit risk and asymmetric information a simplified approach abstract we present a simple model for risky corporate debt debtholders and equityholders have incomplete information about the financial state of the debt issuing company information is incomplete because it is delayed for all agents and it is asymmetrically distributed between debtholders and equityholders we solve for the equityholders optimal default policy and for the credit spreads required by debtholders delayed information accelerates the equityholders optimal decision to default interestingly this effect is small implying only a small impact on credit spreads asymmetric information however has a major impact on credit spreads our model predicts high credit spreads for short term debt as observed empirically in credit markets

the determinants of recovery rates in the us corporate bond market we examine recovery rates of defaulted bonds in the us corporate bond market based on a complete set of traded prices and volumes a study of the trading microstructure around various types of default events is provided we document temporary price pressure with high trading volumes on the default day and the following 30 days and low trading activity thereafter based on this analysis we determine market based recovery rates and quantify various liquidity measures we study the relation between the recovery rates and these measures considering additionally a comprehensive set of bond characteristics firm fundamentals and macroeconomic variables

the intersection of market and credit risk abstract economic theory tells us that market and credit risks are intrinsically related to each other and not separable we describe the two main approaches to pricing credit risky instruments the structural approach and the reduced form approach it is argued that the standard approaches to credit risk management creditmetrics creditrisk and kmv are of limited value when applied to portfolios of interest rate sensitive instruments and in measuring market and credit risk empirically returns on high yield bonds have a higher correlation with equity index returns and a lower correlation with treasury bond index returns than do low yield bonds also macro economic variables appear to influence the aggregate rate of business failures the creditmetrics creditrisk and kmv methodologies cannot reproduce these empirical observations given their constant interest rate assumption however we can incorporate these empirical observations into the reduced form of jarrow and turnbull 1995b drawing the analogy risk 5 63 70 model here default probabilities are correlated due to their dependence on common economic factors default risk and recovery rate uncertainty may not be the sole determinants of the credit spread we show how to incorporate a convenience yield as one of the determinants of the credit spread for credit risk management the time horizon is typically one year or longer this has two important implications since the standard approximations do not apply over a one year horizon first we must use pricing models for risk management some practitioners have taken a different approach than academics in the pricing of credit risky bonds in the event of default a bond holder is legally entitled to accrued interest plus principal we discuss the implications of this fact for pricing second it is necessary to keep track of two probability measures the martingale probability for pricing and the natural probability for value at risk we discuss the benefits of keeping track of these two measures

the salience of culture s consequences the effects of cultural values on top executive commitment to the status quo while top executives are argued to play a central role in strategic adaptation evidence suggests that they are not equally open to organizational change this study extends earlier investigation of the determinants of top executive commitment to the status quo csq to the international arena examining the influence of cultural values on executive open mindedness toward change using data from a survey of top managers in 20 countries analyses reveal that values of individualism uncertainty avoidance power distance and long term orientation are significantly related to executives adherence to existing strategy and leadership profiles further while confirming earlier findings that industry tenure is positively related to strategy csq results show that tenure does not significantly affect leadership csq once cultural values are controlled in summary the findings reveal that culture has an important impact on executive mindsets as demonstrated by the fact that executives of differing cultural background are not equally open to change in organizational strategy and leadership profiles second the findings suggest that executives views of appropriate leadership profiles reflect the imprint of cultural socialization moreso than professional experience finally and more broadly the study offers empirical support for the view that values figure prominently in shaping executives strategic and leadership orientations 1997 by john wiley sons ltd

driving forces for standardization at standardization development organizations this paper investigates sector specific driving forces for the standardization activities at national standardization organizations in the first part theoretical hypotheses concerning sector specific standardization are derived the empirical test is performed by a two step procedure first based on 19 sectors these hypotheses are tested empirically for germany the results show that rd additionally intellectual property rights play an important role furthermore standardization increases with the concentration of the enterprises up to a certain threshold where standardization activities decline again finally export intensive sectors tend to standardize more secondly because of the small data base these hypotheses are empirically tested in a pool model an international cross section approach based on 20 sectors and seven countries these results are generally in concordance with the findings of germany after a summary of the results recommendati

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

pricing black scholes options with correlated credit risk abstract this paper presents an improved method of pricing vulnerable black scholes options under assumptions which are appropriate in many business situations an analytic pricing formula is derived which allows not only for correlation between the option s underlying asset and the credit risk of the counterparty but also for the option writer to have other liabilities further the proportion of nominal claims paid out in default is endogenous to the model and is based on the terminal value of the assets of the counterparty and the amount of other equally ranking claims numerical examples compare the results of this model with those of other pricing formulas based on alternative assumptions and illustrate how the model can be calibrated using market data

callable risky perpetual debt with protection period abstract issuances in the usd 260 bn global market of perpetual risky debt are often motivated by capital requirements for financial institutions we analyze callable risky perpetual debt emphasizing an initial protection grace period before the debt may be called the total market value of debt including the call option is expressed as a portfolio of perpetual debt and barrier options with a time dependent barrier we also analyze how an issuer s optimal bankruptcy decision is affected by the existence of the call option by using closed form approximations the model quantifies the increased coupon and the decreased initial bankruptcy level caused by the embedded option examples indicate that our closed form model produces reasonably precise coupon rates compared to numerical solutions the credit spread produced by our model is in a realistic order of magnitude compared to market data

standardization and variety abstract in the tradeoff between standardization and variety there can be too much or too little variety the latter possibility can only happen if there are several equilibria

pricing default swaps empirical evidence in this paper we compare market prices of credit default swaps with model prices we show that a simple reduced form model outperforms directly comparing bonds credit spreads to default swap premiums we find that the model yields unbiased premium estimates for default swaps on investment grade issuers but only if we use swap or repo rates as proxy for default free interest rates this indicates that the government curve is no longer seen as the reference default free curve we also show that the model is relatively insensitive to the value of the assumed recovery rate

the valuation of floating rate instruments abstract a framework for valuing floating rate notes is developed to examine the effects of 1 lags in the coupon formula 2 special contractual features and 3 default risk evidence from a sample of floaters indicates they sold at significant discounts while lags in the coupon formulas and other contractual features make these notes more variable they do not account for the magnitude of the discounts we conclude that the fixed default premium in the coupon formula of a typical note is inadequate to compensate for time varying default premiums demanded by investors who treat other corporate short term paper as close substitutes

structural models in consumer credit abstract we propose a structural credit risk model for consumer lending using option theory and the concept of the value of the consumer s reputation using brazilian empirical data and a credit bureau score as proxy for creditworthiness we compare a number of alternative models before suggesting one that leads to a simple analytical solution for the probability of default we apply the proposed model to portfolios of consumer loans introducing a factor to account for the mean influence of systemic economic factors on individuals this results in a hybrid structural reduced form model and comparisons are made with the basel ii approach our conclusions partially support that approach for modelling the credit risk of portfolios of retail credit

the impact of cross national carriers of business ethics on attitudes about questionable practices and form of moral reasoning the study explores the impact of cross national carriers of ethics on attitudes about questionable business practices and form of moral reasoning across mexican spanish and u s mbas results show substantial agreement across cultures on twelve personally most objectionable practices while form of moral reasoning varied significantly social cognitive theory is used to address the theoretical and practical implications

the value of embedded real options evidence from consumer automobile lease contracts under the common assumption of constant interest rates we show that penalties for early termination of a lease are often structured in such a way that the cancellation option embedded in consumer automotive leases has little value furthermore our estimates drawn from a sample of three popular car models over 1990 to 2000 indicate that the stand alone value of the lease end purchase option is on average about 16 of the market value of underlying used vehicles or about 1 462 per contract finally we examine the sensitivity of our option value estimates to model parameters and default risk recent years have witnessed a dramatic growth in the leasing of automobiles for instance overall industry sales data indicate that about a third of the new vehicles and trucks sold in the united states are leased hendel and lizzeri 2002 and miller 1995 and the federal reserve board survey of family finances reports that the use of leased vehicles by individuals nonbusiness consumers has risen from 2 9 to 5 8 over the 1992 to 2001 period azicorbe kennickell and moore 2003 consumer automobile lease contracts for new cars often include two embedded options that are not associated with a typical debt contract the first is a cancellation option that allows the lessee to terminate the lease early the second is a european call option which gives the lessee the right but not the obligation to purchase the leased used vehicle at the scheduled termination of the lease at a predetermined exercise price both of these options are simple examples of real options because the asset underlying these options is a used car that is a real asset however these options constitute a special case of real options since they are embedded in the lease contract which is a financial credit instrument theoretical analyses of lease contracts show that the cancellation option is quite valuable schallheim and mcconnell 1985 with respect to the purchase option hendel and lizzeri 2002 argue that they can play an important role in

on pricing of credit spread options abstract this paper describes and analyses different pricing models for credit spread options such as longstaff schwartz black das sundaram and duan garch based models the first two models longstaff schwartz and black assume respectively a mean reverting dynamic and a lognormal distribution for the spread and are representative of the so called spread models such models consider the spread as a unique variable and provide closed form solutions for option pricing on the contrary das sundaram propose a recursive backward induction procedure to price credit spread options on a bivariate tree which describes the dynamic of the term structure of forward risk neutral spread and risk free rate this model belongs to the class of structural models which can be used to price a wider range of credit risk derivatives finally we consider the pricing of credit spread options assuming a discrete time garch model for the spread

wealth culture and corruption this paper examines the impact of national wealth income distribution government size and four cultural variables on the perceived level of corruption in a country the study finds that corruption is significantly correlated to gnp per capita power distance masculinity and uncertainty avoidance significant interaction effects occur in collectivistic and high power distance countries suggestions for future research are developed

chance constrained optimization for pension fund portfolios in the presence of default risk abstract in this paper we consider the portfolio optimization problem for a pension fund consisting of various government and corporate bonds the aim of the problem is to maximize the fund s cash position at the end of the time horizon while allowing for the possibility of bond defaults we model this problem as a stochastic discrete time optimal control problem with a chance constraint that ensures all future outgoing commitments can be met with sufficiently high probability we then introduce a corresponding deterministic formulation that is a conservative approximation of the original stochastic optimal control problem this approximate problem can be solved using gradient based optimization techniques we conclude the paper with a simulation study

systematic equity based credit risk a cev model with jump to default we use equity as the traded primitive for a detailed analysis of systematic default risk default is parsimoniously represented by equity value hitting the zero barrier so that unlike in reduced form models the explicit linkage to the firm s capital structure is preserved but unlike in structural models restrictive assumptions on the structure are avoided default risk is either jump like or diffusive the equity price can jump to default in line with recent empirical evidence on the jump to default risk price we highlight how reasonable choices of the pricing kernel can imply remarkable differences in the equity price dependent status between the objective default intensity and the risk neutral intensity as equity returns experience negative diffusive shocks their cev type local variance increases and boosts the objective and risk neutral probabilities of diffusive default a parsimonious version of our general model simultaneously enables analytical credit risk management and analytical pricing of credit sensitive instruments easy cross asset hedging ensues

implied migration rates from credit barrier models abstract the risk neutral credit migration process captures quantitative information which is relevant to the pricing theory and risk management of credit derivatives in this article we derive implied migration rates by means of a recently introduced credit barrier model which is calibrated on the basis of aggregate information such as credit migration rates and credit spread curves the model is characterized by an underlying stochastic process that represents credit quality and default events are associated to barrier crossings the stochastic process has state dependent volatility and jumps which are estimated by using empirical migration and default rates a risk neutralizing drift and forward liquidity spreads are estimated to consistently match the average spread curves corresponding to all the various ratings the implied migration rates obtained with our credit barrier model are then compared with those obtained via the kijima komoribayashi model

computing optimal recovery policies for financial markets the current financial crisis motivates the study of correlated defaults in financial systems in this paper we focus on such a model which is based on markov random fields this is a probabilistic model in which uncertainty in default probabilities incorporates experts opinions on the default risk based on various credit ratings we consider a bilevel optimization model for finding an optimal recovery policy which companies should be supported given a fixed budget this is closely linked to the problem of finding a maximum likelihood estimator of the defaulting set of agents and we show how to compute this solution efficiently using combinatorial methods we also prove properties of such optimal solutions and give a practical procedure for estimation of model parameters computational examples are presented and experiments indicate that our methods can find optimal recovery policies for up to about 100 companies the overall approach is evaluated on a real world problem concerning the major banks in scandinavia and public loans to our knowledge this is a first attempt to apply combinatorial optimization techniques to this important and expanding area of default risk analysis

the rise and demise of the convertible arbitrage strategy this article analyzes convertible arbitrage one of the most successful hedge fund strategies the aim of the strategy is to exploit underpricing of convertible bonds by taking a long position in a convertible and a short position in the underlying asset the authors find that convertible bonds are underpriced at the issuance dates at the same time short sales of underlying equity increase significantly both effects are stronger and more persistent for equity like convertibles than for debtlike convertibles furthermore short sale pressures negatively affect stock returns around the announcement and issuance dates of convertibles all these factors have likely contributed to the shift toward issuing more debtlike convertibles in recent years which in turn has substantially lowered the returns from convertible arbitrage

discrete versus continuous state switching models for portfolio credit risk abstract dynamic models for credit rating transitions are important ingredients for dynamic credit risk analyses we compare the properties of two such models that have recently been put forward the models mainly differ in their treatment of systematic risk which can be modeled either using discrete states e g expansion versus recession or continuous states it turns out that the implied asset correlations and default rate volatilities for discrete state switching models are implausibly low compared to empirical estimates from the literature we conclude that care has to be taken when discrete state regime switching models are employed for dynamic credit risk management as a side result of our analysis we obtain indirect evidence that asset correlations may change over the business cycle

interaction of credit and liquidity risks modelling and valuation in this paper we discuss the interaction of default risk and liquidity risk on pricing financial contracts we show that two risks are almost indistinguishable if the underlying contract has non negative values however if it can take both positive and negative values then these two risks demand different risk premiums depending on their loss rates and distributions we discuss a structural default model and a discrete time default model with exponentially distributed liquidity shocks we show that short term yield spreads are dominated by liquidity risk rather than credit risk we suggest a two stage procedure to calibrate the model with one scalar optimization problem and one linear programming problem 2005 elsevier b v all rights reserved

modeling sovereign yield spreads a case study of russian debt we construct a model for pricing sovereign debt that accounts for the risks of both default and restructuring and allows for compensation for illiquidity using a new and relatively efficient method we estimate the model using russian dollar denominated bonds we consider the determinants of the russian yield spread the yield differential across different russian bonds and the implications for market integration relative liquidity relative expected recovery rates and implied expectations of different default scenarios this paper develops a model of the termstructure of credit spreads on sovereign bonds that accommodates i default or repudiation the sovereign announces that it will stop making payments on its debt ii restructuring or renegotiation the sovereign and the lenders agree to reduce or postpone the remaining payments and iii a regime switch such as a change of government or the default of another sovereign bond that changes the perceived risk of future defaults we build on the framework of duffie and singleton 1999 showing that cash flows promised by a sovereign bond can be discounted using a default adjusted short termdiscount rate that reflects the m ean arrival rate and associated losses in market value upon arrival of each of the aforementioned types of credit events since a sovereign credit event is often not a liquidation event the model allows for continued trading and pricing of a sovereign instrument through credit events possibly after writedowns in face value or cash distributions to creditors on credit event dates additionally we accommodate the possibility that bonds issued by the same sovereign of exactly the same type but possibly of different maturities may be priced in the market using different discount factors reasons for this may include i bond covenants may not include cross default clauses that would force upon the default of one bond the simultaneous default of other bonds of the same type but of a different maturity for various strategic reasons related to internal

margin adequacy and standards an analysis of the crude oil futures market this article proposes two value based standards for setting the initial margin requirements on futures positions based on the observation that the distributions of the payoffs to futures traders and the potential losses to the futures clearinghouse can be described in terms of the payoffs to barrier options using both margin standards we examine the adequacy of initial margin requirements in the crude oil futures market our results suggest that on average the initial margin requirements set by the new york mercantile exchange exceed the minimum margins required under our option based standards for adequacy

the arbitrage free valuation and hedging of demand deposits and credit card loans abstract using a market segmentation argument this paper uses the interest rate derivative s arbitrage free methodology to value both demand deposit liabilities and credit card loan balances in markets where deposits loan rates may be determined under imperfect competition in this context these financial instruments are shown to be equivalent to a particular interest rate swap where the principal depends on the past history of market rates solutions are obtained which are independent of any particular model for the evolution of the term structure of interest rates

credit risk in a network economy we develop a structural model of credit risk in a network economy where any firm can lend to any other firm so that each firm is subject to counterparty risk either from direct borrowers or from remote firms in the network this model takes into account the role of each firm s cash management we show that we can obtain a semiclosed form formula for the price of debt and equity when cash accounts are buffers to bankruptcy risk as in other structural models the strategic bankruptcy decision of shareholders drives credit spreads and differentiates debt from equity cash flow risk also causes credit risk interdependencies between firms our model applies to the case where not only financial flows but also operations are dependent across firms we use queueing theory to obtain our semiclosed form formulae in steady state we perform a simplified implementation of our model to the u s automotive industry and show how we infer the impact on a supplier s credit spreads of revenue changes in a manufacturer or even in a large car dealer we also obtain prices for first to default and second to default basket credit default swaps

split bond ratings and rating migration abstract this paper examines the relationships between split ratings and ratings migration we find that bonds with split ratings are more likely to have future rating changes a one notch more than one notch split rating increases the probability of rating change within one year of initial issuance by about 3 6 furthermore we find that about 30 of split rated bonds have their two ratings converge after four years of initial issuance the rating convergence tapers off after three years and the rating agency with a higher lower initial rating generally maintains a higher lower rating in subsequent years if the two ratings do not converge we also show that rating transition estimation can be improved by taking into consideration split ratings we find that one year rating transition matrices are significantly different between non letter split rated bonds and letter split rated bonds and we show that the difference has an economically significant impact on the pricing of credit spread options and var based risk management models overall our results suggest that split ratings contain important information about subsequent rating changes

credit swap valuation this review of the pricing of credit swaps a form of derivative security that can be viewed as default insurance on loans or bonds begins with a description of the credit swap contract turns to pricing by reference to spreads over the risk free rate of par floating rate bonds of the same quality and then considers model based pricing the role of asset swap spreads as a reference for pricing credit swaps is also considered

the pricing of credit risk derivatives abstract this paper considers the pricing of derivatives that protect holders of corporate bonds from a reduction in their value because of a deterioration in their credit quality these derivatives are structured as either puts on the bond price or calls on the bond spread above the risk free rate in the context of models developed by merton 1974 and black and cox 1976 the pricing properties of these options are derived using both analytical and numerical methods

default risk in a market model abstract this paper presents a theoretical model of default risk in the context of the market model approach to interest rate dynamics we propose a model for finite interval interest rates such as libor which explicitly takes into account the possibility of default through the influence of a point process with deterministic intensity we relate the defaultable interest rate to the non defaultable interest rate and to the credit risk characteristics default intensity and recovery rate we find that the spread between defaultable and non defaultable rate depends on the non defaultable rate even when the default intensity is deterministic prices of a cap on the defaultable rate and of a credit spread option are derived we consider swaps with unilateral and bilateral default risk and derive the fair fixed swap rate in both cases under the condition that both counterparties are of the same risk class we show that for a monotonously increasing term structure the swap rate for a defaultable swap will lie below the swap rate for a swap without default risk

pricing interest rate derivative securities this article shows that the one state variableinterest rate models of vasicek 1977 and cox ingersoll and ross 1985b can be extended sothat they are consistent with both the current termstructure of interest rates and either the currentvolatilities of all spot interest rates or the currentvolatilities of all forward interest rates theextended vasicek model is shown to be very tracta ble analytically the article compares option pricesobtained using the extended vasicek model withthose obtained using a number of other models

bond pricing and the term structure of interest rates a new methodology for contingent claims valuation this paper presents a unifying theory for valuing contingent claims under a stochastic term structure of interest rates the methodology based on the equivalent martingale measure technique takes as given an initial forward rate curve and a family of potential stochastic processee for its subsequent movements a no arbitrage condition restricts this family of processes yielding valuation formulae for interest rate sensitive contingent claims which do not explicitly depend on the market prices of risk examples are provided to illustrate the key results in relation to the term structure of interest rates arbitrage pricing theory has two purposes the first is to price all zero coupon default free bonds of varying maturities from a finite number of economic fundamentals called state variables the second is to price all interest rate sensitive contingent claims taking as given the prices of the zero coupon bonds this paper presents a general theory and a unifying framework for understanding arbitrage pricing theory in this context of which all existing arbitrage pricing models are special cases in particular vasicek 1977 brennan and schwartz 1979 langetieg 1980 ball and torous 1983 ho and lee 1986 schaefer and schwartz 1987 and artzner and delbaen 1988 the primary contribution of this paper however is a new methodology for solving the second problem i e the pricing of interest rate sensitive contingent claims given the prices of all zero coupon bonds the methodology is new because i it imposes its stochastic structure directly on the evolution of the forward rate curve ii it does not require an inversion of the term structure to eliminate the market prices of risk from contingent claim values and iii it has a stochastic spot rate process with multiple stochastic factors influencing the term structure the model can be used to consistently price and hedge all contingent claims american or european on the term structure and it is derived from necessary and more importantly sufficient conditions for the absence of arbitrage the arbitrage pricing models of vasicek 1977 brennan and schwartz 1979 langetieg 1980 and artzner and delbaen 1988 all require an iformerly titled bond pricing and the term structure of interest rates a new methodology

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

a discrete time approach to arbitrage free pricing of credit derivatives this paper develops a framework for modelling risky debt and valuing credit derivatives that is flexible and simple to implement and that is to the maximum extent possible based on observables our approach is based on expanding the heath jarrow morton term structure model to allow for defaultable debt rather than follow the procedure of implying out the behavior of spreads from assumptions concerning the default process we work directly with the evolution of spreads the risk neutral drifts in the resulting model possess a recursive representation that facilitates implementation and makes it possible to handle path dependence and early exercise features without difficulty the framework permits embedding a variety of specifications for default we present an empirical example of a default structure which provides promising calibration results

measurement estimation and comparison of credit migration matrices abstract credit migration matrices are cardinal inputs to many risk management applications their accurate estimation is therefore critical we explore two approaches cohort and two variants of duration one imposing the other relaxing time homogeneity and the resulting differences both statistically through matrix norms and economically using a credit portfolio model we propose a new metric for comparing these matrices based on singular values and apply it to credit rating histories of s p rated us firms from 1981 2002 we show that the migration matrices have been increasing in size since the mid 1990s with 2002 being the largest in the sense of being the most dynamic we develop a testing procedure using bootstrap techniques to assess statistically the differences between migration matrices as represented by our metric we demonstrate that it can matter substantially which estimation method is chosen economic credit risk capital differences implied by different estimation techniques can be as large as differences between economic regimes recession vs expansion ignoring the efficiency gain inherent in the duration methods by using the cohort method instead is more damaging than imposing a possibly false assumption of time homogeneity

survival bias and the equity premium puzzle previous authors have raised the concern that there could be serious survival bias in the observed u s equity premium contrary to conventional wisdom we argue that the survival bias in the u s data is unlikely to be significant to reach this conclusion we introduce a general framework for modeling survival and derive a mathematical relationship between the ex ante survival probability and the average survival bias this relationship reveals the fundamental difficulty facing the survival argument high survival bias requires an ex ante probability of market failure which seems unrealistically high given the history of world financial markets copyright the american finance association 2002

voting on standardisation this paper analyses equilibria of voting on commodity standards within the framework of a farrell saloner model which takes into consideration the trade off between network effects and losses from a reduction of variety social welfare implications are derived and discussed with respect to manipulations of majority rules the findings indicate that welfare implications of standards are highly sensitive to the decision procedure and that the choice of the decision rule is non trivial as it can at least prevent worst outcomes if not guarantee optimal results

the valuation of default triggered credit derivatives credit derivatives are among the fastest growing contracts in the derivatives market we present a simple easily implementable model to study the pricing and hedging of two widely traded default triggered claims default swaps and default baskets in particular we demonstrate how default correlation the correlation between two default processes impacts the prices of these claims when we extend our model to continuous time we find that once default correlation has been taken into consideration the spread dynamics have very little explanatory power

dynamic asset pricing theory with uncertain time horizon abstract this paper addresses the problem of pricing and hedging a random cash flow received at a random date in a general setup with a random time that is not a stopping time of the filtration generated by asset prices we first provide an explicit characterization of the set of equivalent martingale measures we also present price bounds consistent with perfect replication in the absence of arbitrage as is often the case such bounds are too wide to be of any practical use and we consider several choices for narrowing down to one the number of equivalent martingale measures

pricing foreign currency options under stochastic interest rates abstract in this paper we build a general framework to price contingent claims on foreign currencies using the heath et al 1987 model of the term structure closed form solutions are obtained for european options on currencies and currency futures assuming that the volatility functions determining the term structure are deterministic as such this paper provides an example of a bond price process for both the domestic and foreign economies consistent with grabbe s 1983 formulation of the same problem

modes of theorizing in strategic human resource management tests of universalistic contingency and configurational performance predictions the field of strategic human resource management shrm has been criticized for lacking a solid theoretical foundation this article documents that contrary to this criticism the shrm literature

debt maturity structure with pre emptive creditors abstract critics of international solvency regimes argue that such regimes heighten financial fragility because creditors pre empt each other by lending at ever shorter maturities in a rush for the exits we model such behaviour explicitly in order to examine the effects of workouts on the maturity profile of debt

a two factor hazard rate model for pricing risky debt and the term structure of credit spreads this paper proposes a two factor hazard rate model in closed form to price risky debt the likelihood of default is captured by the firm s non interest sensitive assets and defaultfree interest rates the distinguishing features of the model are threefold first the impact of capital structure changes on credit spreads can be analyzed second the model allows stochastic interest rates to impact current asset values as well as their evolution finally the proposed model is in closed form enabling us to undertake comparative statics analysis compute parameter deltas of the model calibrate empirical credit spreads and determine hedge positions credit spreads generated by our model are consistent with empirical observations

currency competition network externalities and switching costs towards an alternative view of optimum currency areas existing models of currency competition and monetary union ignore network effects and switching costs this paper develops a simple model that incorporates these features and shows how it can be used to shed light on observed monetary experience and current issues in international monetary relations it explains why agents will often be reluctant to switch currencies highlights the role of expectations and sheds light on the nature of currency competition and the effect of legal restrictions copyright 1993 by royal economic society

bargaining power fear of disagreement and wage settlements theory and evidence from u s industry the paper develops and estimates a theoretical model of wage determination and union nonunion wage differentials in order to overcome the institutional ctiticisms of the formal bargaining literature the paper generalizes the nash zeuthen harsanyi model by linking the solution to the institutional concepts of bargaining power and fear or cost of disagreement and by making the outcome depend not only on endogenous but also on exogenous factors an operational specification of bargaining power and fear of disagreement allows the model to be estimated with data covering twelve companies and trade unions during the period from mid 1950 s to the late 1970 s while giving limited support to the nashzeuthen harsanyi solution the empirical analysis indicates that the bargaining outcome usually deviates from the nash zeuthen harsanyi point and in accordance with the institutionalist claim that it varies significantly with exogenous factors contrary to the traditional labor economics view the results do not support the general conclusion that the bargaining solution lies on the marginal revenue product curve of labor instead the relevant coefficients suggest that for many firms and unions the outcome might be better characterized by the efficient contract vertical contract curve

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

continuous workout mortgages efficient pricing and systemic implications abstract this paper studies the continuous workout mortgage cwm a two in one product a fixed rate home loan coupled with negative equity insurance to advocate its viability in mitigating financial fragility in order to tackle the many issues that cwms embrace we perform a range of tasks we optimally price cwms and take a systemic market based approach stipulating that mortgage values and payments should be linked to housing prices and adjusted downward to prevent negative equity we illustrate that amortizing cwms can be the efficient home financing choice for many households we price cwms as american option style defaulting debt in conjunction with prepayment within a continuous time analytic framework we introduce random prepayments via the intensity approach of jarrow and turnbull 1995 we also model the optimal embedded option to default whose exercise is motivated by decreasing random house prices we adapt the barone adesi and whaley 1987 baw approach to work within amortizing mortgage context we derive new closed form and new analytical approximation methodologies which apply both for pricing cwms as well as for pricing the standard us 30 year fixed rate mortgage frm

pricing and static hedging of american style knock in options on defaultable stocks abstract this paper applies the static hedge portfolio approach shp of chung et al 2013 in two new directions first the shp approach is generalized from the constant elasticity of variance cev model of cox 1975 to the jump to default extended cev jdcev framework of carr and linetsky 2006 for this purpose the recovery value of the american style down and in put is hedged through the one attached to a european style plain vanilla contract whereas for an up and in put it is necessary to use the recovery component of the corresponding european style up and in option second the shp methodology is adapted from single to double barrier american style knock in options by matching the value of the hedging portfolio along both lower and upper barriers finally and to benchmark the accuracy of the novel shp pricing solutions the optimal stopping approach of nunes 2009 is also extended to price american style double knock in options under the jdcev framework such extension highlights the relevant credit derivative component embedded in american style knock in equity puts

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

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

estimating asset correlations from stock prices or default rates which method is superior this paper sets out to help explain why estimates of asset correlations based on equity prices tend to be considerably higher than estimates based on default rates resolving this empirical puzzle is highly important because firstly asset correlations are a key driver of credit risk and secondly both data sources are widely used to calibrate risk models of financial institutions by means of a simulation study we explore the hypothesis that differences in the correlation estimates are due to a substantial downward bias characteristic of estimates based on default rates by varying the time horizon the default probability the asset correlation and the number of firms in the portfolio we investigate these estimators in a systematic comparative study our results suggest that correlation estimates from equity returns are more efficient than those from default rates this finding still holds if the model is misspecified such that asset correlations follow a vasicek process which affects foremost the estimates from equity returns the results lend support for the hypothesis that the downward bias of default rate based estimates is an important although not the only factor to explain the differences in correlation estimates furthermore our results help to quantify the estimation error of asset correlations dependent on the true values of default probability and asset correlation

bond indenture provisions and the risk of corporate debt abstract this paper examines the effect of alternative bond indenture provisions on the allocation of risk among the firm s claimants the approach taken here differs from that of earlier studies in that risk allocation is examined while the firm s leverage in market value terms is held constant in this context four indenture provisions are examined 1 the time to maturity 2 the promised payment schedule 3 financing restrictions and 4 priority rules it is concluded that risk is transferred from stockholders to bondholders as the time to maturity and promised payment increase appropriately furthermore substitution of longer term debt for an equal amount of shorter term debt also increases the risk to bondholders while decreasing the risk to stockholders the analysis shows that a coupon bond can be represented by a unique discount bond with the same risk and value this permits the characterization of the effective maturity of a risky debt issue a concept analogous to the stochastic duration of a default free coupon bond these results are shown to be independent of the means used to finance the debt issue finally it is concluded that the relative risk associated with different bonds issued by the same firm cannot be determined by the structure of priority rules alone it is also necessary to consider the timing of the promised payments compared to that of the other debt issues in the firm s capital structure

uncertainty avoidance and the preference for innovation championing roles this paper examines the preferences of 4405 individuals in forty three organizations from sixty eight different countries for four innovation championing roles the organizational maverick the network facilitator the transformational leader and the organizational buffer the study shows that the cultural value of uncertainty acceptance is significantly associated with preferences for these four championing roles it suggests that uncertainty accepting societies may be more innovative than uncertainty avoiding societies because of the greater legitimacy of those roles

a pricing model for secondary market yield based floating rate notes subject to default risk abstract the purpose of this article is to price secondary market yield based floating rate notes smy frns subject to default risk smy frns are derivatives on the default free term structure of interest rates on the term structures for default risky credit classes and on the structure of a determined pool of bonds the main problem in smy frn pricing as compared to the pricing of standard interest rate or credit derivatives is market incompleteness which makes traditional no arbitrage pricing by replication fail in general smy frns are subject to two types of default risk first the smy frn issuer may go bankrupt direct default risk second the possibility of the bankruptcy of the issuers in the underlying pool has an influence on the smy frn coupons indirect default risk this article is the first one which provides a no arbitrage pricing model for smy frns with direct and indirect default risks it is also the first article applying incomplete market pricing methodology to smy frns

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

how to invest optimally in corporate bonds a reduced form approach abstract in this paper we analyze the impact of default risk on the portfolio decision of an investor wishing to invest in corporate bonds default risk is modeled via a reduced form approach and we allow for random recovery as well as joint default events depending on the structure of the model we are able to derive almost explicit results for the optimal portfolio strategies it is demonstrated how these strategies change if common default factors can trigger defaults of more than one bond or recovery rates are stochastic in particular we analyze the effect of beta distributed loss rates

pricing credit derivatives with rating transitions we present a model for pricing risky debt and valuing credit derivatives that is easily calibrated to existing variables our approach expands a classical term structure model to allow for multiple rating classes of debt the framework has two salient features 1 it uses a rating transition matrix as the driver for the default process and 2 the entire set of rating categories is calibrated jointly which allows arbitrage free restrictions across rating classes as a bond migrates among them we illustrate the approach by applying it to price credit sensitive notes that have coupon payments linked to the rating of the underlying credit

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

the term structure of lease rates with endogenous default triggers and tenant capital structure theory and evidence this paper focuses on the defaultable lease rate term structure with endogenous default we combine the competitive lease market argument proposed by grenadier 1996 and the endogenous default structural model proposed by leland and toft 1996 to examine the interaction between the lessee s capital structure and the equilibrium lease rate under this framework determining the lease rate is a simultaneous equation problem that captures the tradeofi between debt and lease flnancing using data on 2 482 real estate lease transactions we empirically conflrm the predictions derived from the numerical analysis of the model

high yield bond default and call risks this paper empirically investigates high yield bond default and call behavior using a competing risks hazard model that simultaneously estimates the impact of bond age issue specific characteristics and business conditions on both events results reveal nonmonotonic aging effects default rates increase and then drop while call rates first increase and then level off rating and coupon size affect default risk while maturity and issue size impact only call rates defaults are more likely when economic conditions have worsened and no improvement is anticipated calls are more likely when interest rates have decreased but are expected to rise

valuing commercial mortgages an empirical investigation of the contingent claims approach to pricing risky debt this paper empirically investigates a contingent claims model of commercial mortgage pricing we find that the magnitude of the observed default premia for a sample of nonprepayable fixed rate bullet mortgages can be explained by the contingent claims model in addition the model explains a significant proportion of the period to period changes in the default premia however given an assumed negative correlation between building value changes and interest rate changes the model s risk structure tends to increase less steeply with increasing maturity than the observed risk structure since the seminal work of black and scholes 1973 corporate liabilities have been modeled as options on the total value of the firm this contingent claims approach to bond pricing was refined by merton 1974 to allow for cash dispersals prior to the bonds maturities and by brennan and schwartz 1980 and ingersoll 1987 to allow for interest rate uncertainty although variants of these bond pricing models are currently being used extensively on wall street they have not been tested extensively moreover empirical studies have not successfully accounted for the observed spread between the rates on risky and default free debt jones mason and rosenfeld 1984 empirically investigate a model that assumes a nonstochastic term structure of interest rates while ramaswamy and sundaresan 1986 examine a model with stochastic interest rates to price floating rate notes in both cases the models could not explain the observed default premia the relative lack of empirical analysis is due partly to the complicated nature of corporate bonds major corporations generally have a large number of different bond issues outstanding that have different priorities in the event that the firm goes bankrupt moreover the bonds can have a variety of covenants specifying sinking fund provisions conditions under which technical default will occur and other restrictions that can have an impact on their value although these complications do not preclude pricing various bond issues on a case by case basis they make it difficult to test systematically the accuracy of the pricing model

a one factor model of interest rates and its application to treasury bond options 1990 a one factor model of interest rates and its application to treasury bond options financial analysts journal vol 46 no 1 pp 33 39

term structure movements and pricing interest rate contingent claims this paper derives an arbitrage free interest rate movements model ar model this model takes the complete term structure as given and derives the subsequent stochastic movement of the term structure such that the movement is arbitrage free we then show that the ar model can be used to price interest rate contingent claims relative to the observed complete term structure of interest rates this paper also studies the behavior and the economics of the model our approach can be used to price a broad range of interest rate contingent claims including bond options and callable bonds

the impact of corruption on firm tax compliance in transition economies whom do you trust tax compliance is an important issue for gov ernments and the public alike to meet public needs and fund public mandates firms around the world are expected to comply with tax laws factors that are related to orga nizational firm tax compliance have not been sufficiently examined in the literature owing to the increasing global influence of transition economies factors associated with firm tax compliance in transition economies are particu larly of interest based on a sample of over 5 000 firms from 22 former soviet bloc transition economies we find that higher levels of corruption and higher levels of par ticularized trust reliance on friends and family are asso ciated with lower levels of tax compliance interestingly we also find that the negative relationship between cor ruption and tax compliance is weakened in situations of higher generalized trust trust in strangers overall our study s results suggest that institutional factors play an important role and are related to firm tax compliance behavior in transition economies

standard setting organisations and standard essential patents voting and markets the analysis provides conditions under which standard setting organisations ssos choose efficient technology standards i introduce a two stage game with both voting and market competition in equilibrium standards and market outcomes are efficient even with market power from scarce capacity and standard essential patents seps i show that a drastic innovation with seps generates greater social welfare than a less efficient standard without seps a key finding is that voting power and market power have counterbalancing effects the discussion helps explain empirical observation of differences in sso voting rules intellectual property ip rules membership and alliances

credit derivatives with multiple debt issues abstract we evaluate the most actively traded types of credit derivatives within a unified pricing framework that allows for multiple debt issues since firms default on all of their obligations total debt is instrumental in the likelihood of default and therefore in credit derivatives valuation we use a single factor interest rate model where the exponential default frontier is based on total debt and is made coherent with observed bond prices analytical formulae are derived for credit default swaps total return swaps both fixed for fixed and fixed for floating and credit risk options cros price behaviors and hedging properties of all these credit derivatives are investigated simulations document that credit derivatives prices may be significantly affected by terms of debt other than those of the reference obligation the analysis of cros indicates their superior ability to fine tune the hedging of magnitude and arrival risks of default

pricing derivatives on financial securities subject to credit risk this article provides a new methodology for pricing and hedging derivative securities involving credit risk two types of credit risks are considered the first is where the asset underlying the derivative security may default the second is where the writer of the derivative security may default we apply the foreign currency analogy of jarrow and turnbull 1991 to decompose the dollar payoff from a risky security into a certain payoff and a spot exchange rate arbitrage free valuation techniques are then employed this methodology can be applied to corporate debt and over the counter derivatives such as swaps and caps the purpose of this article is to provide a new theory for pricing and hedging derivative securities involving credit risk two sources of credit risk are identified and analyzed the first is where the asset underlying the derivative security may default paying off less than promised this is the case for example with imbedded options on corporate debt the second is the credit risk introduced by the writer of the derivative security who may also default examples include over the counter writers of options on eurodollar futures swaps and swaptions for pricing derivative securities involving credit risk there are currently two approaches the first views these derivatives as contingent claims not on the financial securities themselves but as compound options on the assets underlying the financial securities this is the case for example with the pricing of imbedded options on corporate debt see merton 1974 1977 black and cox 1976 ho and singer 1982 chance 1990 and kim ramaswamy and sundaresan 1993 or the pricing of vulnerable options see johnson and stulz 1987 in practice however this valuation methodology is difficult to use first the assets underlying the financial security are often not tradeable and therefore their values are not observable this makes application of the theory and estimation of the relevant parameters problematic second as in the case of corporate debt all of the other liabilities of the firm senior to the corporate debt must first and simultaneously be valued this generates significant computational difficulties as a result this approach has not

the implied reserves of the bank insurance fund abstract option models of deposit insurance pricing view assessment rates as put option premiums however such models ignore the risk of guaranty fund default this paper attempts to link risk based premiums with guaranty fund reserves in a partial equilibrium setting by employing a methodology based on options with credit risk the value of full insurance per coverage period is expressed as a standard options premium and is decomposed into two parts the explicit part is due to the available assets reserves of the guaranty fund while the implicit part comes from federal support contingent on the adequacy of reserves at the end of the coverage period implied reserves are derived under an exogenous insurance coverage rate as a policy parameter the method is illustrated on a sample of 40 large bank holding companies and an extension to the case of several insured banks is provided

security pricing and deviations from the absolute priority rule in bankruptcy proceedings claims ultimately awarded to shareholders of firms in reorganization were examined for a sample of 30 filings under the 1978 bankruptcy reform act we measured the amount paid to shareholders in excess of that which they would have received under the absolute priority rule and found that this amount represents on average 7 6 of the total awarded to all claimants evidence is also reported that common share values reflect a significant proportion of value ultimately received in violation of absolute priority suggesting that deviations from the rule were expected by the equity markets the absolute priority rule hereafter apr states that a bankrupt firm s value is to be distributed to suppliers of capital such that senior creditors are fully satisfied before any distributions are made to junior creditors and junior creditors are paid in full before common shareholders bankruptcy reorganization proceedings however are leaving shareholders and junior creditors with valuable assets even when senior claimants receive only partial settlements as barrett and sullivan 1988 noted traditionally shareholders have been last in line their claims on a troubled company s assets have had the lowest priority and their impact on the course of bankruptcy code proceedings generally has been next to nil but lately the balance of power has been shifting warner 1977 provided one of the early discussions of the implications of deviations from the apr baldwin and mason 1983 pp 510 511 examined the resolution of claims in the massey ferguson reorganization and provided no support for the hypothesis that the market believes absolute priority rules will be enforced if the firm defaults on its financial obligations franks and torous 1989 analyzed a sample of bankruptcies that occurred during the period 1970 through 1984 and found that 21 of 27 sample cases exhibited departures from the apr more recently weiss 1990 examined 37 firms that filed for bankruptcy between 1980 and 1986 and reported that 27 of the cases involved apr violations

the liquidity effects of official bond market intervention to ensure depth and liquidity the european central bank intervened in sovereign debt markets through its securities markets programme smp providing a unique opportunity to estimate the effects of large scale asset purchases on sovereign bond liquidity premia from reduced form estimates we find robust economically significant impact and lasting reductions in sovereign bonds liquidity premia in response to official purchases we develop a search based asset pricing model to understand our empirical results the theory implies that bond liquidity premia fall in response to both official purchases and rising sovereign default probabilities as seen in the data

the pricing of options with default risk this paper considers the pricing of options with default risk the comparative statics of such options can differ from those of ordinary options and early exercise of such american call options can be optimal several examples of options with default risk are considered traditionally it has been assumed that options have no default risk such an assumption is reasonable when one studies options traded on an organized exchange in the u s default on such options would require as cox and rubinstein 5 put it a very sudden and strong movement in stock prices one considerably more extreme than any on record p 71 however many options and financial assets containing option like payoffs are sold by firms that have limited assets for such options default is often a possibility that must be taken seriously in this paper we study how options subject to default risk which we hereinafter call vulnerable options are priced it turns out that many of the well established results of the option pricing literature see e g smith 12 and references therein do not hold for vulnerable options in particular the value of a vulnerable european option can fall with time to maturity with the interest rate and with the variance of the underlying asset furthermore it may pay to exercise early a vulnerable american option on a non dividend paying asset

affine modeling of credit risk pricing of credit events and contagion we propose a discrete time affine pricing model that simultaneously allows for i the presence of systemic entities by departing from the no jump condition on the factors conditional distribution

the effect of firm profit versus personal economic well being on the level of ethical responses given by managers members of organizations are continually making decisions that have important consequences for themselves and the firms for which they work in some cases these decisions affect human well being and social welfare and thus have important ethical impacts for those affected by the decisions

credit contagion and aggregate losses abstract credit contagion refers to the propagation of economic distress from one firm to another this article proposes a reduced form model for these contagion phenomena assuming they are due to the local interaction of firms in a business partner network we study aggregate credit losses on large portfolios of financial positions contracted with firms subject to credit contagion in particular we provide an explicit gaussian approximation of the distribution of portfolio losses this enables us to quantify the relation between the volatility of losses and the determinants of credit contagion we find that contagion processes have typically a second order effect on portfolio losses they induce additional fluctuations of losses around their averages whose size depends on the number of business partners of the firms

situational ethics across borders a multicultural examination managers throughout the world regularly face ethical dilemmas that have important and perhaps complex professional and personal implications further societal consequences of decisions made can be far reaching in this study 210 financial services managers from australia chile ecuador and the united states were queried about their ethical beliefs when faced with four diverse dilemmas in addition the situational context was altered so the respondent viewed each dilemma from a top management position and from a position of economic hardship results suggest a complex interaction of situation culture and issue when individuals make ethical judgments specifically chileans were found to have different beliefs about sex discrimination and child labor dilemmas when compared to their colleagues from the other three nations chileans and australians also disagreed on the bribery dilemma anglo managers were more likely than latin american managers to change their ethical responses when the situation was altered for multinational firms interested in maintaining healthy ethical climates the findings suggest that culturally contingent ethical guidelines or policies adapted to the local customs must be considered further managers must remain aware of issues related to specific situations both internal and external that would cause subordinates to alter their moral judgment

reducing the impact of real estate foreclosures with amortizing participation mortgages we employ amortizing participation mortgage apm to offer a novel ex post renegotiation method of a foreclosure apm belongs to the family of home loan credit facilities advocated in the dodd frank wall street reform and consumer protection act 2010 in our framework apms reduce the endemic agency costs of debt by improving affordability these benefits increase the demand for real estate in bust times and reduce fragility of the financial system thereby preventing foreclosures we evaluate apms in a stochastic control framework and provide solutions for an optimal amortization schedule we generalize our approach to partially amortizing and commercial mortgages which encompass balloon payments finally we provide concrete numerical examples of home loan modifications we also offer detailed sensitivity analysis to market parameters such as house price volatility and interest rates