recent developments in consumer credit risk assessment consumer credit risk assessment involves the use of risk assessment tools to manage a borrower s account from the time of pre screening a potential application through to the management of the account during its life and possible write off the riskiness of lending to a credit applicant is usually estimated using a logistic regression model though researchers have considered many other types of classifier and whilst preliminary evidence suggest support vector machines seem to be the most accurate data quality issues may prevent these laboratory based results from being achieved in practice the training of a classifier on a sample of accepted applicants rather than on a sample representative of the applicant population seems not to result in bias though it does result in difficulties in setting the cut off profit scoring is a promising line of research and the basel 2 accord has had profound implications for the way in which credit applicants are assessed and bank policies adopted

systemic risk contributions a credit portfolio approach we put forward a merton type multi factor portfolio model for assessing banks contributions to systemic risk this model accounts for the major drivers of banks systemic relevance size default risk and correlation of banks assets as a proxy for interconnectedness we measure systemic risk in terms of the portfolio expected shortfall es banks marginal risk contributions are calculated based on partial derivatives of the es in order to ensure a full risk allocation among institutions we compare the performance of an importance sampling algorithm with a fast analytical approximation of the es and the marginal risk contributions furthermore we show empirically for a portfolio of large international banks how our approach could be implemented to compute bank specic capital surcharges for systemic risk or stabilisation fees we nd that size alone is not a reliable proxy for the systemic importance of a bank in this framework in order to smooth cyclical uctuations of the risk measure we explore a time varying condence level of the es

credit spreads an empirical analysis on the informational content of stocks bonds and cds this paper explores the dynamic relationship between stock market implied credit spreads cds spreads and bond spreads a general vecm representation is proposed for changes in the three credit spread measures which accounts for zero one or two independent cointegration equations depending on the evidence provided by any particular company empirical analysis on price discovery based on a proprietary sample of north american and european firms and tailored to the specific vecm at hand indicates that stocks lead cds and bonds more frequently than the other way round it likewise confirms the leading role of cds with respect to bonds

risk factor contributions in portfolio credit risk models abstract determining contributions to overall portfolio risk is an important topic in risk management for positions instruments and sub portfolios this problem has been well studied and a significant theory built around the calculation of marginal contributions we consider the problem of determining the contributions to portfolio risk of risk factors this cannot be addressed through an immediate extension of techniques for position contributions since the portfolio loss is a nonlinear function of the risk factors we employ the hoeffding decomposition of the portfolio loss into a sum of terms depending on the factors this decomposition restores linearity but includes terms arising from joint effects of groups of factors these cross factor terms provide information to risk managers since they can be viewed as best hedges of the portfolio loss involving instruments of increasing complexity we illustrate the technique on multi factor portfolio credit risk models where systematic factors represent industries geographical sectors etc

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

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

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

environmental quality competition and eco labeling abstract a three stage game of investment environmental quality provision and price competition is developed to study the impact of green technology investment eco labeling in a duopoly model of vertical product differentiation the firms incentives to invest in green technologies depend on their relative cost structure when firms are identical with respect to fixed costs both firms will always invest but if one firm is more efficient in investing then the other firm may or may not invest depending on the level of unit cost of investment quality competition will be tighter when the low quality firm is more efficient and looser when the high quality firm is more efficient in investing socially optimal investment for both firms is always positive but lower than in the duopoly solution in the absence of environmental externalities the quality dispersion chosen by profit maximizing firms may be too high or too low while environmental externalities increase the possibility low quality dispersion that is too low within the market solution finally and importantly ecolabeling can be used as a means of reducing excessive investment and increasing environmental quality that is too low

the triple bottom line meeting ecological economic and social goals with individual transferable quotas this paper deals with the sustainable management of a renewable resource based on individual and transferable quotas itqs when agents differ in terms of harvesting costs or catch capability in a dynamic bio economic model we determine the feasibility conditions under which a fishery manager can achieve sustainability objectives which simultaneously account for stock conservation economic efficiency and maintenance of fishing activity for the agents along time we show how the viability of quota management strategies based on itq depends on the degree of heterogeneity of users in the fishery the current status and the dynamics of the stock together with the selection of tac schedules in particular for a given stock we compute the maximin effort for a given set of agents and we derive the maximal number of active agents for a given guaranteed effort an application to the nephrops fishery in the bay of biscay illustrates the results

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

bank lending policy credit scoring and the survival of loans to evaluate loan applicants banks increasingly use credit scoring models the objective of such models typically is to minimize default rates or the number of incorrectly classified loans thereby they fail to take into account that loans are multiperiod contracts for which reason it is important for banks not only to know if but also when a loan will default in this paper a bivariate tobit model with a variable censoring threshold and sample selection effects is estimated for 1 the decision to provide a loan or not and 2 the survival time of granted loans the model proves to be an effective tool to separate applicants with short and with long survival times the bank s loan provision process is shown to be inefficient loans are granted in a way that conflicts with both default risk minimization and survival time maximization there is thus no trade off between higher default risk and higher return in the lending policy

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

market discipline financial crisis and regulatory changes evidence from indonesian banks abstract following the 1997 1998 financial crisis indonesian banks experienced major regulatory changes including the adoption of the blanket guarantee scheme bgs in 1998 a limited guarantee lg in 2005 and changes in capital regulation in 1998 and 2001 we examine the impact of these regulatory changes on market discipline during the period 1995 2009 the price of deposits is used to measure market discipline in a dynamic panel data methodology on a sample of 104 commercial banks we find a weakening of market discipline following the introduction of the bgs the result is consistent with the deposit insurance scheme being credible in the lower capital requirement environment the adoption of lg in a recovering economy also mitigates the role of market discipline however market discipline is more pronounced in listed banks than unlisted banks and in foreign banks than domestic banks these results have important implications for banking regulation and supervision particularly during a crisis period

expected shortfall and beyond financial institutions have to allocate so called economic capital in order to guarantee solvency to their clients and counterparties mathematically speaking any methodology of allocating capital is a risk measure i e a function mapping random variables to the real numbers nowadays value at risk var which is defined as a fixed level quantile of the random variable under consideration is the most popular risk measure unfortunately it fails to reward diversification as it is not subadditive in the search for a suitable alternative to var expected shortfall es or conditional var or tail var has been characterized as the smallest coherent and law invariant risk measure to dominate var we discuss these and some other properties of es as well as its generalization to a class of coherent risk measures which can incorporate higher moment effects moreover we suggest a general method on how to attribute es risk contributions to portfolio components

spillovers in regional fisheries management do catch shares cause leakage regional councils manage u s fisheries fishermen can participate in fisheries managed by multiple councils and effort controls in one region could lead to effort leakage into another theoretical modeling demonstrates that positive negative and no leakage are possible using difference in differences we test for leakage across regional boundaries for a catch share program in new england and find evidence that the new england groundfish sector program caused spillover into adjacent mid atlantic fisheries aggregate mid atlantic harvest volume increased among sector members after the policy change we find leakage in individual fisheries with similar gear and high market substitutability with sector species

an analytic approach to credit risk of large corporate bond and loan portfolios abstract we derive an analytic approximation to the credit loss distribution of large portfolios by letting the number of exposures tend to infinity defaults and rating migrations for individual exposures are driven by a factor model in order to capture co movements in changing credit quality the limiting credit loss distribution obeys the empirical stylized facts of skewness and heavy tails we show how portfolio features like the degree of systematic risk credit quality and term to maturity affect the distributional shape of portfolio credit losses using empirical data it appears that the basle 8 rule corresponds to quantiles with confidence levels exceeding 98 the limit law s relevance for credit risk management is investigated further by checking its applicability to portfolios with a finite number of exposures relatively homogeneous portfolios of 300 exposures can be well approximated by the limit law a minimum of 800 exposures is required if portfolios are relatively heterogeneous realistic loan portfolios often contain thousands of exposures implying that our analytic approach can be a fast and accurate alternative to the standard monte carlo simulation techniques adopted in much of the literature

analyzing the impact of credit migration in a portfolio setting abstract credit migration is an essential component of credit portfolio modeling in this paper we outline a framework for gauging the effects of credit migration on portfolio risk measurements for a typical loan portfolio we find credit migration can explain as much as 51 of volatility and 35 of economic capital we compare through the cycle migration effects implied by agency rating transitions with point in time migration implied by edf expected default frequency transitions and find that migration of point in time credit quality accounts for a greater fraction of total portfolio risk when compared with through the cycle dynamics in a stylized analytic setting we show that when controlling for pd term structure effects higher likelihood of moving away from the current credit state does not necessarily imply greater risk finally we review methods for generating high frequency transition matrices needed for analyzing instruments with cash flows or contingencies whose frequencies are asynchronous to an available transition matrix we further demonstrate that the naive application of such methods can result in material deviations to portfolio analytics

seasonal harvest patterns in multispecies fisheries fishers face multidimensional decisions when to fish what species to target and how much gear to deploy most bioeconomic models assume single species fisheries with perfectly elastic demand and focus on inter seasonal dynamics in real world fisheries vessels hold quotas for multiple species with heterogeneous biological and or market conditions that vary intra seasonally we analyze within season behavior in multispecies fisheries with individual fishing quotas accounting for stock aggregations capacity constraints and downward sloping demand numerical results demonstrate variation in harvest patterns we specifically find 1 harvests for species with downward sloping demand tend to spread out 2 spreading harvest of a high value species can cause lower value species to be harvested earlier in the season and 3 harvest can be unresponsive or even respond negatively to biological aggregation when fishers balance incentives in multispecies settings we test these using panel data from the norwegian multispecies groundfish fishery and find evidence for all three we extend the numerical model to account for transitions to management with individual fishing quotas in multispecies fisheries we show that under some circumstances fishing seasons could contract or spread out

location choice in new england trawl fisheries old habits die hard in his seminal work on common property resources h scott gordon proposed that in a fishery with multiple grounds effort would be distributed such that profit rates would be equal among them gordon s model relies on implicit assumptions that are inaccurate and lead to false conclusions in many cases in this paper we present an empirically estimated model of fishery and location choice for large trawlers in new england using a random utility framework with a nested logit model specification we use the model to test the validity of a behavioral model developed from ethnographic interviews with skippers

importance sampling for portfolio credit risk monte carlo simulation is widely used to measure the credit risk in portfolios of loans corporate bonds and other instruments subject to possible default the accurate measurement of credit risk is often a rare event simulation problem because default probabilities are low for highly rated obligors and because risk management is particularly concerned with rare but significant losses resulting from a large number of defaults this makes importance sampling is potentially attractive but the application of is is complicated by the mechanisms used to model dependence between obligors and capturing this dependence is essential to a portfolio view of credit risk this paper provides an is procedure for the widely used normal copula model of portfolio credit risk the procedure has two parts one applies is conditional on a set of common factors affecting multiple obligors the other applies is to the factors themselves the relative importance of the two parts of the procedure is determined by the strength of the dependence between obligors we provide both theoretical and numerical support for the method

private property and economic efficiency a study of a common pool resource abstract the british columbia halibut fishery provides a natural experiment of the effects of privatizing the commons using firm level data from the fishery 2 years before private harvesting rights were introduced the year they were implemented and 3 years afterward a stochastic frontier is estimated to test for changes in technical allocative and economic efficiency the study indicates that 1 the short run efficiency gains from privatization may take several years to materialize and can be compromised by restrictions on transferability duration and divisibility of the property right 2 substantial long run gains in efficiency can be jeopardized by preexisting regulations and the bundling of the property right to the capital stock and 3 the gains from privatization are not just in terms of cost efficiency but include important benefits in revenue and product form

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

trading book and credit risk how fundamental is the basel review abstract within the new basel regulatory framework for market risks non securitization credit positions in the trading book are subject to a separate default risk charge formally incremental default risk charge banks using the internal model approach are required to use a two factor model and a 99 9 var capital charge this model prescription is intended to reduce risk weighted asset variability a known feature of internal models and improve their comparability among financial institutions in this paper we analyze the theoretical foundations and relevance of these proposals we investigate the practical implications of the two factor and correlation calibration constraints through numerical applications we introduce the hoeffding decomposition of the aggregate unconditional loss to provide a systematic idiosyncratic representation in particular we examine the impacts of a j factor correlation structure on risk measures and risk factor contributions for long only and long short credit sensitive portfolios

collateral type of lender and relationship banking as determinants of credit risk abstract this paper analyses the determinants of the probability of default pd of bank loans we focus the discussion on the role of a limited set of variables collateral type of lender and bank borrower relationship while controlling for the other explanatory variables the study uses information on the more than three million loans entered into by spanish credit institutions over a complete business cycle 1988 2000 collected by the bank of spain s credit register central de informacion de riesgos we find that collateralised loans have a higher pd loans granted by savings banks are riskier and finally that a close bank borrower relationship increases the willingness to take more risk

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

calibration of the default probability model abstract in this paper we study the calibration problem for the merton vasicek default probability model robert merton on the pricing of corporate debt the risk structure of interest rate journal of finance 29 1974 449 470 we derive conditions that guarantee existence and uniqueness of the solution using analytical properties of the model we propose a fast calibration procedure for the conditional default probability model in the integrated market and credit risk framework our solution allows one to avoid numerical integration problems as well as problems related to the numerical solution of the nonlinear equations

discrete modelling of supply response under uncertainty the case of the fishery abstract in the absence of complete control in a regulated industry effective management requires prediction of firms behavioral responses to public policy this paper develops a discrete choice model of supply response under uncertainty and applies it to fishery choice problems of new england fishing firms while fishermen demonstrate a bias towards remaining within the same fishery sufficient incentives in terms of changes in expected returns and risk are shown to elicit response due to extreme uncertainty concerning population dynamics of fish stocks a satisficing approach to management facilitated by this type of modelling may be more appropriate than bioeconomic optimization

dissecting the tragedy a spatial model of behavior in the commons abstract much of the discussion of the tragedy of the commons focuses on aggregate impacts often in data poor developing country settings few non experimental empirical studies shed light on contextual circumstances driving the extent of rent dissipation and overexploitation we utilize a high resolution data set to estimate a behavioral model of fishermen s spatial choices a unique policy setting allows us to measure the degree to which individual fishermen s choices appear aimed at mitigating the tragedy of the commons in a small numbers setting we find evidence of partial mitigation in excess of what we would expect under pure self interest but short of what would occur under group maximizing behavior we also examine how contextual factors in the fishery shape the degree of cooperation within the fishing season and find evidence that competition for the common pool resource distorts fishermen s implicit cost of distance creating a form of common property inertia

interest rate changes and the timing of debt issues abstract there is much recent interest in the role of market timing in firm financial decisions using a large detailed sample of corporate public debt issues private placements rule 144a issues and bank loans over the period 1970 2006 we investigate the relationship between interest rate changes and issues of floating and fixed rate debt our results indicate that both past and future rates are associated with issuance decisions we examine whether firms are able to lower their cost of capital by anticipating future rate changes controlling for firm characteristics and market conditions our findings suggest that evidence of timing success is dependent on the time interval and type of debt examined over the longest time intervals available in our data we do not find evidence of timing ability for fixed rate or floating rate debt issues

an empirical approach to ecosystem based fishery management abstract marine scientists and policymakers are encouraging ecosystem based fishery management ebfm but there is limited guidance on how to operationalize the concept we adapt financial portfolio theory as a method for ebfm that accounts for species interdependencies uncertainty and sustainability constraints illustrating our method with routinely collected data available from the chesapeake bay we demonstrate the gains from taking into account variances and covariances of gross fishing revenues in setting species total allowable catches we find over the period from 1962 2003 that managers could have increased the revenues from fishing and reduced the variance by employing ebfm frontiers in setting catch levels

fast pricing of basket default swaps a basket default swap is a derivative security tied to an underlying basket of corporate bonds or other assets subject to credit risk the value of the contract depends on the joint distribution of the default times of the underlying assets valuing a basket default swap often entails monte carlo simulation of these default times for baskets of high quality credits and for swaps that require multiple defaults to trigger payment pricing the swap is a rare event simulation problem the joshi kainth algorithm is an innovative importance sampling technique for this problem that forces a predetermined number of defaults to occur on each path this paper analyzes extends and improves the joshi kainth algorithm we show that in its original form the algorithm can actually increase variance we present an alternative that is guaranteed to reduce variance even when defaults are not rare along the way we provide a rigorous underpinning in a setting sufficiently general to include both the original method and the version proposed here

forecasting and decomposition of portfolio credit risk using macroeconomic and frailty factors this paper presents a dynamic portfolio credit model following the regulatory framework using macroeconomic and latent risk factors to predict the aggregate loan portfolio loss in a banking system the latent risk factors have three levels global across the entire banking system parent sectoral for the intermediate loan sectors and sector specific for the individual loan sectors the aggregate credit loss distribution of the banking system over a risk horizon is generated by monte carlo simulation and a quantile estimator is used to produce the aggregate risk measure and economic capital the risk contributions of the individual sectors and risk factors are measured by combining the hoeffding decomposition with the euler capital allocation rule for the u s banking system we find that the real gdp growth rate the global and sector wide frailty risk factors and their spillovers significantly affect loan defaults and the impacts of the frailty factors are not only economy wide but also sector specific we also find that the frailty risk factors make more significant risk contributions to the aggregate portfolio risk than the macroeconomic factors while the macroeconomic factors help to improve the accuracy and efficiency of the credit risk forecasts

viewpoint induced innovation in fisheries and aquaculture abstract some classical economists most notably malthus predicted that scarcity would undermine long term human well being john stuart mill in contrast predicted that the threat of scarcity creates incentives for innovation that help to avoid some of the worst outcomes popular claims of marine ecologists often apply the malthusian narrative to supplies of seafood yet global supplies have continued to grow we examine the modern seafood industry and evaluate mill s claims about innovation we argue that the mechanisms that mill discusses innovation in response to and in anticipation of scarcity account for much of what we see scarcities induce technological policy and market innovations that enable seafood supplies to grow and these innovations can build on each other the challenge for policy makers is to avoid knee jerk responses to malthusian narratives and craft policy responses that encourage innovation while recognizing physical limits of ocean resources

credit contagion from counterparty risk standard credit risk models cannot explain the observed clustering of default some times described as credit contagion this paper provides the first empirical analysis of credit contagion via direct counterparty effects we find that bankruptcy announce ments cause negative abnormal equity returns and increases in cds spreads for credi tors in addition creditors with large exposures are more likely to suffer from financial distress later this suggests that counterparty risk is a potential additional channel of credit contagion indeed the fear of counterparty defaults among financial institu tions explains the sudden worsening of the credit crisis after the lehman bankruptcy in september 2008

forecasting bankruptcy more accurately a simple hazard model i argue that hazard models are more appropriate than single period models for forecasting bankruptcy single period models are inconsistent while hazard models produce consistent estimates i describe a simple technique for estimating a discrete time hazard model i find that about half of the accounting ratios that have been used in previous models are not statistically significant moreover market size past stock returns and idiosyncratic returns variability are all strongly related to bankruptcy i propose a model that uses both accounting ratios and market driven variables to produce out of sample forecasts that are more accurate than those of alternative models copyright 2001 by university of chicago press

capital requirements and business cycle regimes forward looking modelling of default probabilities abstract this paper proposes a forward looking model for time varying capital requirements which finds application within basel ii the model rests on the relationship between default rates and the business cycle by positing two regimes expansion and recession and by forecasting the associated probabilities the default probability for each rating class is defined as the expected value of a default rate whose distribution is a mixture of an expansion and a recession distribution the application to us data over the forecasting period 1971 2002 provides evidence that the model makes it possible to preserve the risk sensitivity of the capital requirement and at the same time to dampen procyclicality

good vs bad characteristics in vertical differentiation abstract we consider a vertically differentiated duopoly where product quality is defined as the combination of n characteristics good respectively bad characteristics are those which increase decrease utility with respect to the status quo we prove that maximum minimum differentiation obtains along all characteristics respect to which marginal profits are positive negative

fishing quota markets abstract in 1986 new zealand responded to the open access problem by establishing the world s largest individual transferable quota itq system using a 15 year panel dataset from new zealand that covers 33 species and more than 150 markets for fishing quotas we assess trends in market activity price dispersion and the fundamentals determining quota prices we find that market activity is sufficiently high in the economically important markets and that price dispersion has decreased we also find evidence of economically rational behavior through the relationship between quota lease and sale prices and fishing output and input prices ecological variability and market interest rates controlling for these factors our results show a greater increase in quota prices for fish stocks that faced significant reductions consistent with increased profitability due to rationalization overall this suggests that these markets are operating reasonably well implying that itqs can be effective instruments for efficient fisheries management

simulating risk contributions of credit portfolios the 2007 2009 financial turmoil highlighted the need for more active management of credit portfolios after measuring portfolio credit risk an important step toward active risk management is to measure risk contributions of individual obligors to the overall risk of the portfolio in practice value at risk is often used as a risk measure for credit portfolios and it can be decomposed into a sum of the risk contributions of individual obligors estimation of these risk contributions is computationally challenging mainly because they are expectations conditioned on a rare event in this paper we tackle this computational problem by developing a restricted importance sampling ris method for a class of conditional independence credit risk models where defaults of obligors are conditionally independent given an appropriately chosen random vector we propose fast estimators for risk contributions and their confidence intervals furthermore we study the incorporation of traditional importance sampling methods into the ris method to further improve its efficiency for the widely used gaussian copula model numerical examples show that the proposed method works well

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

a model of regulated open access resource use abstract this paper develops a model of regulated open access resource exploitation the regulatory model assumes that regulators are goal oriented choosing target harvest levels according to a safe stock concept these harvest quotas are implemented by setting season lengths conditioned on the industry fishing capacity the industry enters until rents are dissipated conditioned on season length regulations harvest levels fishing capacity season length and biomass are determined jointly using parameter estimates from the long regulated north pacific halibut fishery predictions of these variables from the regulated open access model are compared to predictions that arise from the gordon model

empirical credit cycles and capital buffer formation abstract we model 1927 1997 us business failure rates using an unobserved components time series model clear evidence is found of cyclical behavior in default rates we also detect significant longer term movements in default rates and default correlations in a multi year backtest experiment we show that accommodation of default rate dynamics has important consequences for credit risk capitalization requirements static or myopic variants of credit portfolio models miss significant periods of credit risk accumulation empirically congruent dynamic models by contrast provide more timely warning signals of credit risk build up in this way they may mitigate some of the pro cyclicality concerns

importance sampling for integrated market and credit portfolio models a sophisticated approach for computing the total economic capital needed for various stochastically dependent risk types is the bottom up approach in this approach usually market and credit risks of financial instruments are modeled simultaneously as integrating market risk factors into standard credit portfolio models increases the computational burden of calculating risk measures it is analyzed to which extent importance sampling techniques previously developed either for pure market portfolio models or for pure credit portfolio models can be successfully applied to integrated market and credit portfolio models specific problems which arise in this context are discussed the effectiveness of these techniques is tested by numerical experiments for linear and non linear portfolios

markets and rent dissipation in regulated open access fisheries abstract using a model of regulated open access resource use with markets we illustrate the potential complexity of interactions between markets product quality excess effort and regulatory behavior in fisheries our model assumes two product types one of which is processed and storable the model describes the equilibrium that results when effort responds to open access incentives and when regulators respond to effort growth by mitigating its potential harmful effects on biomass safety we use numerical simulations to demonstrate a mechanism by which market growth leads to the diversion of raw inputs into the inherently inferior market the result is a scenario in which rents are dissipated not only because excessive inputs raise costs but also because inferior product types reduce revenues we conclude with an illustrative decomposition of rent gains into revenue and cost savings gains from rationalizing a hypothetical fishery demonstrating the potential significance of market side rents

assessing efficiency gains from individual transferable quotas an application to the mid atlantic surf clam and ocean quahog fishery delayed fishing fleet restructuring complicates the assessment of efficiency gains from individual transferable quota itq fisheries management programs this article presents a methodology to estimate harvest sector efficiency gains in lieu of incomplete fleet restructuring the methodology is applied to assess the efficiency gains in the mid atlantic surf clam and ocean quahog fishery itq program while roughly 128 vessels harvested clams under the previous management regime the analysis suggests that 21 25 vessels will remain under ltqs the efficiency gains are estimated to be between 11 1 million and 12 8 million annually 1990 dollars

sushi or fish fingers seafood diversity collapsing fish stocks and multispecies fishery management we present a model of a multispecies fishery and we show the following i consumer preferences for seafood diversity can trigger a sequential collapse of fish stocks under open access fishery ii the stronger the preferences are for diversity the higher is the need for coordinated multispecies regulation iii second best optimal management of only one or a few species is less strict than socially optimal management of the same species iv myopic regulation of one species ignoring spillovers to other species can cause depletion of other stocks that would not be depleted under open access

common failings how corporate defaults are correlated we test the doubly stochastic assumption under which firms default times are correlated only as implied by the correlation of factors determining their default intensities using data on u s corporations from 1979 to 2004 this assumption is violated in the presence of contagion or frailty unobservable explanatory variables that are correlated across firms our tests do not depend on the time series properties of default intensities the data do not support the joint hypothesis of well specified default intensities and the doubly stochastic assumption we find some evidence of default clustering exceeding that implied by the doubly stochastic model with the given intensities why do corporate defaults cluster in time several explanations have been explored first firms may be exposed to common or correlated risk factors whose co movements cause correlated changes in conditional default probabilities second the event of default by one firm may be contagious in that one such event may directly induce other corporate failures as with the collapse of penn central railway in 1970 third learning from default may generate default correlation for example to the extent that the defaults of enron and worldcom revealed accounting irregularities that could be present in other firms they may have had a direct impact on the conditional default probabilities of other firms our primary objective is to examine whether cross firm default correlation that is associated with observable factors determining conditional default probabilities the first channel on its own is sufficient to account for the degree of time clustering in defaults that we find in the data

did the repeated debt ceiling controversies embed default risk in us treasury securities abstract we examine whether the financial market charged a default risk premium to us treasury securities when the us federal government repeatedly reached the legally binding debt limits between 2002 and 2006 we show that for the first two of the four recurrences since the first episode in 1996 the financial market charged a small default risk premium to the treasury securities however we find no significant evidence of a pricing effect in the last two recurrences the results suggest that the financial market gradually perceived the budget standoffs as the boy who cried wolf

estimating the distribution of total default losses on the spanish financial system abstract this paper quantifies the credit risk loss distribution of the spanish financial system by introducing a general monte carlo importance sampling is approach we start obtaining all the required information for the standard credit risk model then we quantify the loss distribution under the standard is method and allocate the total risk over the different institutions in the spanish financial system we extend the current is framework to deal with more general assumptions like random recoveries and market valuation we also study the variability of the risk measures over the business cycle and the possible variability due to the model parameters uncertainty our results show that this approach can be very useful for banking supervisors from a macroprudential point of view and that the risk allocation can vary considerably depending on the valuation model under analysis

fast simulation of multifactor portfolio credit risk this paper develops rare event simulation methods for the estimation of portfolio credit risk the risk of losses to a portfolio resulting from defaults of assets in the portfolio portfolio credit risk is measured through probabilities of large losses which are typically due to defaults of many obligors sources of credit risk to which a portfolio is exposed an essential element of a portfolio view of credit risk is a model of dependence between these sources of credit risk large losses occur rarely and are most likely to result from systematic risk factors that affect multiple obligors as a consequence estimating portfolio credit risk poses a challenge both because of the rare event property of large losses and the dependence between defaults to address this problem we develop an importance sampling technique within the widely used gaussian copula model of dependence we focus on difficulties arising in multifactor models that is models in which multiple factors may be common to multiple obligors resulting in complex dependence between defaults our importance sampling procedure shifts the mean of the common factor to increase the frequency of large losses in multifactor models different combinations of factor outcomes and defaults can produce large losses so our method combines multiple importance sampling distributions each associated with a shift in the mean of common factors we characterize optimal mean shifts finding these points is both a combinatorial problem and a convex optimization problem so we address computational aspects of this step as well we establish asymptotic optimality results for our method showing that unlike standard simulation it remains efficient as the event of interest becomes rarer subject classifications simulation efficiency variance reduction probability large deviations finance credit risk portfolio area of review simulation history received august 2005 revisions received january 2007 may 2007 accepted june 2007

remarks on good vs bad characteristics in vertical differentiation abstract in a recent paper garella and lambertini economic letters 65 1999 245 claim that we should distinguish between good and bad characteristics in analysing the incentives for a duopoly to vertically differentiate their products we prove here that the results obtained by the authors are false and we show that in the context of their model maximum differentiation should appear whether characteristic is good or bad

ratings migration and the business cycle with application to credit portfolio stress testing the turmoil in the capital markets in 1997 and 1998 has highlighted the need for systematic stress testing of banks portfolios including both their trading and lending books we propose that underlying macroeconomic volatility is a key part of a useful conceptual framework for stress testing credit portfolios and that credit migration matrices provide the specific linkages between underlying macroeconomic conditions and asset quality credit migration matrices which characterize the expected changes in credit quality of obligors are cardinal inputs to many applications including portfolio risk assessment modeling the term structure of credit risk premia and pricing of credit derivatives they are also an integral part of many of the credit portfolio models used by financial institutions by separating the economy into two states or regimes expansion and contraction and conditioning the migration matrix on these states we show that the loss distribution of credit portfolios can differ greatly as can the concomitant level of economic capital to be assigned

modeling financial sector joint tail risk in the euro area we develop a novel high dimensional non gaussian modeling framework to infer measures of conditional and joint default risk for numerous financial sector firms the model is based on a dynamic generalized hyperbolic skewed t block equicorrelation copula with time varying volatility and dependence parameters that naturally accommodates asymmetries heavy tails as well as non linear and time varying default dependence we apply a conditional law of large numbers in this setting to define joint and conditional risk measures that can be evaluated quickly and reliably we apply the modeling framework to assess the joint risk from multiple defaults in the euro area during the 2008 2012 financial and sovereign debt crisis we document unprecedented tail risks between 2011 2012 as well as their steep decline following subsequent policy actions jel classification g21 c32

location choice of commercial fishermen with heterogeneous risk preferences location choice of commercial fishermen with heterogeneous risk preferences author s johan a mistiaen and ivar e strand reviewed work s source american journal of agricultural economics vol 82 no 5 proceedings issue dec 2000 pp 1184 1190 published by oxford university press on behalf of the agricultural applied economics association stable url http www jstor org stable 1244248 accessed 25 01 2012 20 19

loan growth and riskiness of banks we investigate whether loan growth affects the riskiness of individual banks in 16 major countries using bankscope data from more than 16 000 individual banks during 1997 2007 we test three hypotheses on the relation between abnormal loan growth and asset risk bank profitability and bank solvency we find that loan growth leads to an increase in loan loss provisions during the subsequent three years to a decrease in relative interest income and to lower capital ratios further analyses show that loan growth also has a negative impact on the risk adjusted interest income these results suggest that loan growth represents an important driver of the riskiness of banks

analytical methods for hedging systematic credit risk with linear factor portfolios abstract multi factor credit portfolio models are used widely today for managing economic capital and pricing collateralized debt obligations cdos and asset backed securities commonly practitioners allocate capital to the portfolio components sub portfolios counterparties or transactions the hedging of credit risk is generally also focused on the deltas of underlying names we present analytical results for hedging portfolio credit risk with linear combinations of systematic factors based on the minimization of systematic variance of portfolio losses we solve these problems within a multi factor merton type credit portfolio model and apply them to hedge systematic credit default losses of loan portfolios and cdos

a new approach to optimal capital allocation for rorac maximization in banks abstract we introduce a new model for optimal internal capital allocation which would allow banks to maximize their return on risk adjusted capital rorac under regulatory and capital constraints we extend the single period model of buch et al 2011 to a multi period model and improve its forecasting accuracy by including the debt effect and bayesian learning innovations the empirical application shows that our model significantly improves the rorac of a sample of banks listed in the s p 500 index

performance drivers of shipping loans an empirical investigation credit risk is a major issue for lenders and borrowers threatening the reliability of global logistics operations enhanced mechanisms of credit risk analysis are needed to safeguard banks and the flow of goods in supply chains little emphasis has been given to the contextual examination of such factors either in terms of market conditions or the particular characteristics of different industries this paper investigates the varying importance of a number of factors connected with the performance of corporate bank loans during times of financial turbulence in the shipping industry little extant literature exists on default risk drivers for loans made to shipping companies for new build vessels or second hand ship purchases a binary logit model is used to examine the criteria for assessing the security of shipping loans issued by banks thirty shipping loans made during the period 2005 2009 are examined results suggest that financial factors non financial factors shipowners experience and employability and market risk indicators are the best criteria for evaluating the performance of shipping loans during turbulent market conditions and periods when financing options are restricted the paper makes a specific contribution to the literature on risk management with regard to credit risk analysis by highlighting shipping specific factors and their importance for risk measurement the results are of interest to banks seeking to accurately assess the credibility of shipping loans shipowners who can identify credit risk factors on which to focus and supply chain participants where unfulfilled bank financing can cause disruptions to their logistics operations

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

risk capital allocation for rorac optimization abstract this paper considers the financial optimization problem of a firm with several sub businesses striving for its optimal rorac an insightful example shows that the implementation of classical gradient capital allocation can be suboptimal if division managers are allowed to venture into all business whose marginal rorac exceeds the firm s rorac the marginal rorac requirements are refined by adding a risk correction term that takes into account the interdependencies of the risks of different lines of business it is shown that under certain stationarity conditions this approach can guarantee that the optimal rorac will eventually be achieved

dynamic hedging of synthetic cdo tranches with spread risk and default contagion the paper is concerned with the hedging of credit derivatives in particular synthetic cdo tranches in a dynamic portfolio credit risk model with spread risk and default contagion the model is constructed and studied via markov chain techniques we discuss the immunization of a cdo tranche against spread and event risk in the markov chain model and compare the results with market standard hedge ratios obtained in a gauss copula model in the main part of the paper we derive model based dynamic hedging strategies and study their properties in numerical experiments