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

network models and financial stability abstract systemic risk is a key concern for central banks charged with safeguarding overall financial stability in this paper we investigate how systemic risk is affected by the structure of the financial system we construct banking systems that are composed of a number of banks that are connected by interbank linkages we then vary the key parameters that define the structure of the financial system including its level of capitalisation the degree to which banks are connected the size of interbank exposures and the degree of concentration of the system and analyse the influence of these parameters on the likelihood of knock on defaults first we find that the better capitalised banks are the more resilient is the banking system against contagious defaults and this effect is non linear second the effect of the degree of connectivity is non monotonic i e initially a small increase in connectivity increases the contagion effect but after a certain threshold value connectivity improves the ability of a banking system to absorb shocks third the size of interbank liabilities tends to increase the risk of knock on default even if banks hold capital against such exposures fourth more concentrated banking systems are shown to be prone to larger systemic risk all else equal in an extension to the main analysis we study how liquidity effects interact with banking structure to produce a greater chance of systemic breakdown we finally consider how the risk of contagion might depend on the degree of asymmetry tiering inherent in the structure of the banking system a number of our results have important implications for public policy which this paper also draws out

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

mitigating the pro cyclicality of basel ii policy discussions on the recent financial crisis feature widespread calls to address the pro cyclical effects of regulation the main concern is that the new risk sensitive bank capital regulation basel ii may amplify business cycle fluctuations this paper compares the leading alternative procedures that have been proposed to mitigate this problem we estimate a model of the probabilities of default pds of spanish firms during the period 1987 2008 and use the estimated pds to compute the corresponding series of basel ii capital requirements per unit of loans these requirements move significantly along the business cycle ranging from 7 6 in 2006 to 11 9 in 1993 the comparison of the different procedures is based on the criterion of minimizing the root mean square deviations of each adjusted series with respect to the hodrick prescott trend of the original series the results show that the best procedures are either to smooth the input of the basel ii formula by using through the cycle pds or to smooth the output with a multiplier based on gdp growth our discussion concludes that the latter is better in terms of simplicity transparency and consistency with banks risk pricing and risk management systems for the portfolio of spanish commercial and industrial loans and a 45 loss given default lgd the multiplier would amount to a 6 5 surcharge for each standard deviation in gdp growth the surcharge would be significantly higher with cyclically varying lgds rafael repullo jesus saurina and carlos trucharte

nonlinear valuation under credit funding and margins existence uniqueness invariance and disentanglement abstract since the 2008 global financial crisis the banking industry has been using valuation adjustments to account for default risk and funding costs these adjustments are computed separately and added together by practitioners as if the valuation equations were linear this assumption is too strong and does not allow to model market features such as different borrowing and lending rates and replacement default closeout hence we argue that the full valuation equations are nonlinear and this paper is devoted to studying the nonlinear valuation equations introduced in pallavicini et al 2011 we illustrate all the cash flows exchanged by the parties involved in a derivative contract in presence of default risk collateralisation with re hypothecation and funding costs then we show how to obtain semi linear pdes or forward backward stochastic differential equations fbsdes from present valuing said cash flows in an arbitrage free setup and we study the well posedness of these pdes and fbsdes in a viscosity and classical sense moreover from a financial perspective we discuss cases where classical valuation adjustments xva can be disentangled we show how funding costs are offset by treasury valuation adjustments when one takes a whole bank perspective in the valuation while the same costs are not offset by such adjustments when taking a shareholder perspective we show that although we use a risk neutral valuation framework based on a locally risk free bank account our final valuation equations do not depend on the risk free rate finally we show how to consistently derive a netting set valuation from a portfolio level one

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

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

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

modeling correlated market and credit risk in fixed income portfolios abstract current risk assessment methodologies separate the analysis of market and credit risk and thus misestimate security and portfolio risk levels we propose a new approach that relates financial market volatility to firm specific credit risk and integrates interest rate interest rate spread and foreign exchange rate risk into one overall fixed income portfolio risk assessment accounting for the correlation between these significant risk factors as well as portfolio diversification results in improved risk measurement and management the methodology is shown to produce reasonable credit transition probabilities prices for bonds with credit risk and portfolio value at risk measures

dynamic factor models with macro frailty and industry effects for u s default counts the credit crisis of 2008 we develop a high dimensional nonlinear and non gaussian dynamic factor model for the decomposition of systematic default risk conditions into latent components for 1 macroeconomic financial risk 2 autonomous default dynamics frailty and 3 industry specific effects we analyze discrete u s corporate default counts together with macroeconomic and financial variables in one unifying framework we find that approximately 35 of default rate variation is due to systematic and industry factors approximately one third of this systematic variation is captured by the macroeconomic and financial factors the remainder is captured by frailty 40 and industry 25 effects the default specific effects are particularly relevant before and during times of financial turbulence we detect a build up of systematic risk over the period preceding the 2008 credit crisis this article has online supplementary material

asset fixity and investment asymmetry in agriculture fixed asset theory implies that it is more difficult to dispose of capital specific to agricultural production than to add to the stock of specialized capital this theory is tested by determining whether transitions between states of disinvestment are as likely as transitions between states of investment of the twenty four annual capital stock series analyzed evidence of asymmetry between investment and disinvestment is strong in eight cases weak in four and insignificant in twelve there is considerable although mixed evidence of asymmetry for tractors farm and nonfarm and other specialized vehicles since world war ii and for agricultural machinery

production and investment decisions under sunk cost and temporal uncertainty building on glenn johnson s asset fixity theory this article introduces sunk cost and temporal uncertainty in jorgenson s neoclassical theory of investment under the assumption of risk neutrality we show sunk cost and temporal risk affect the implicit rental value of capital and investment and entry exit decisions results suggest there are important interactions between sunk cost and the effects of temporal uncertainty on production behavior

the role of copulas in the housing crisis abstract due to its simplicity and familiarity the gaussian copula is popular in calculating risk in collaterized debt obligations but it imposes asymptotic independence such that extreme events appear to be unrelated this restriction might be innocuous in normal times but during extreme events such as the housing crisis the gaussian copula might be inappropriate this paper explores various copula specifications and finds that the degree to which housing prices are related based on the gaussian copula is too small compared with real housing price data

sequential importance sampling and resampling for dynamic portfolio credit risk we provide a sequential monte carlo method for estimating rare event probabilities in dynamic intensity based point process models of portfolio credit risk the method is based on a change of measure and involves a resampling mechanism we propose resampling weights that lead under technical conditions to a logarithmically efficient simulation estimator of the probability of large portfolio losses a numerical analysis illustrates the features of the method and contrasts it with other rare event schemes recently developed for portfolio credit risk including an interacting particle scheme and an importance sampling scheme

hedging downside risk of oil refineries a vine copula approach abstract the financial health of an oil refinery greatly depends on its refining margin or the difference between the prices of its refined products typically gasoline and heating oil and the cost of crude oil the refinery may hedge against the downside risk of unfavorable price movements using crude oil gasoline and heating oil futures this paper examines the use of a vine copula approach to estimate multiproduct hedge ratios that minimize the downside risk of the refinery the advantage of the vine copula approach is that it allows us to capture important characteristics of petroleum price changes including skewness and fat tailedness in the marginal distributions of individual price change series as well as heterogeneous tail dependence patterns between different pairs of price changes the out of sample hedging effectiveness of two popular classes of vine copula models canonical c and drawable d vine copula models are evaluated and compared with that of the widely used nonparametric method and three standard multivariate copula models the empirical results reveal that the d vine copula model is a good and safe choice in managing the downside risk of the refinery

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

conditional euro area sovereign default risk we propose an empirical framework to assess the likelihood of joint and conditional sovereign default from observed cds prices our model is based on a dynamic skewed t distribution that captures all salient features of the data including skewed and heavy tailed changes in the price of cds protection against sovereign default as well as dynamic volatilities and correlations that ensure that uncertainty and risk dependence can increase in times of stress we apply the framework to euro area sovereign cds spreads during the euro area debt crisis our results reveal significant time variation in distress dependence and spill over effects for sovereign default risk we investigate market perceptions of joint and conditional sovereign risk around announcements of eurosystem asset purchases programs and document a strong impact on joint risk

estimating bilateral exposures in the german interbank market is there a danger of contagion abstract credit risk associated with interbank lending may lead to domino effects where the failure of one bank results in the failure of other banks not directly affected by the initial shock recent work in economic theory shows that this risk of contagion depends on the precise pattern of interbank linkages we use balance sheet information to estimate a matrix of bilateral credit relationships for the german banking system and test whether the breakdown of a single bank can lead to contagion we find that in the absence of a safety net there is considerable scope for contagion that could affect a large proportion of the banking system the financial safety net in this case institutional guarantees for saving banks and cooperative banks considerably reduces but does not eliminate the danger of contagion even so the failure of a single bank could lead to the breakdown of up to 15 of the banking system in terms of assets

flexible dependence modeling of operational risk losses and its impact on total capital requirements abstract operational risk data when available are usually scarce heavy tailed and possibly dependent in this work we introduce a model that captures such real world characteristics and explicitly deals with heterogeneous pairwise and tail dependence of losses by considering flexible families of copulas we can easily move beyond modeling bivariate dependence among losses and estimate the total risk capital for the seven and eight dimensional distributions of event types and business lines using real world data we then evaluate the impact of realistic dependence modeling on estimating the total regulatory capital which turns out to be up to 38 smaller than what the standard basel approach would prescribe

testing asset fixity for u s agriculture comment whether a farmer considers an asset fixed or variable as plans are made for managing the farm depends on current opportunity costs three opportunities are particularly relevant at the time a farm management decision is made the value of an asset in use on the farm the cost of acquiring more of the asset and the benefits of disposing of some of the asset already owned by the farmer in the event that an asset can be disposed of at the same price that it can be acquired that asset is not subject to fixity and the three costs will equal one another on an optimally organized farm consider a pair of shoes acquired on a department store charge account if after taking them home the buyer finds they pinch his feet he may return them the next day and get his money back the difference between acquisition cost and salvage value at this time is negligible it is only the inconvenience of making another trip to the store suppose he discovers that the shoes pinch as he wears them at work the next day the use value is now below the acquisition cost of another pair of shoes but the salvage value of this pair has dropped precipitously his current salvage opportunities now include giving the shoes to a relative selling them to a used clothing merchant or taking an income tax deduction by giving them to charity shoes were considered a variable asset when the buyer shopped for them he expected them to be worth more to him than he paid for them they were not subject to fixity until after he wore them but that bit of history becomes irrelevant whether the shoes are a fixed or variable asset depends on whether the buyer can salvage them for more than the value he might get by tossing them in the closet with the expectation of wearing them occasionally in the event that the current salvage value of an owned asset is below the acquisition cost of an additional and comparable one the asset is subject to fixity whether it is fixed or not in a given situation depends on a comparison among opportunity costs that apply at the time the decision is made if the opportunities for using the asset on the farm exceed the cost of acquiring more of the asset the asset is variable and the profit maximizing farmer will acquire more of it if the opportunities for selling the asset in the salvage market exceed the value in use on the farm the asset is variable and the profit maximizing farmer will dispose of some or all of it when the level of use of an asset is not worth changing the farmer considers it fixed the use value is less than or equal to the acquisition cost so expansion is not profitable and the use value equals or exceeds the salvage value so it is not profitable to sell it the three relevant costs have the following relationship on an optimally organized farm acquisition cost equals or exceeds the opportunity cost of using the asset on the farm and on farm opportunity cost equals or exceeds the salvage value these ideas are readily incorporated into economic analyses of individual farms a farm manager need not decide prior to analysis what is to be fixed and what is variable the list of fixed assets is determined endogenously as part of the farm management plan the list of fixed assets varies with the initial farm organization in place at the time the planning process begins and with opportunity costs associated with buying selling and using assets subject to fixity the difficulty with fixed asset theory is in its aggregation from firm to industry problems the uniqueness of each individual farm organization is lost in the aggregation to all farms and the off farm opportunity costs which are appropriate to individual farm situations are not included in the aggregate price series used by economists to analyze the allocation of natural resources and purchased farm inputs among alternative uses the aggregation problems and data limitations make fixed asset analysis difficult at the aggregate level despite its complete simplicity at the farm level for example farm machinery is subject to fixity during a given interval the level of machinery use may increase on some farms decrease on some and remain fixed on others the net change in the aggregate whether positive negative or zero says little about the role of the fixed asset in aggregate production some degree of disaggregation is required but these difficulties do not make the consideration of fixed assets in the supply response of u s agriculture any the less important as chambers and vasavada put it asset fixity must exist at the aggregate level p 764 inasmuch as asset fixity affects the supply functions of individual farms it requires no great leap of imagination to suppose that asset fixity affects the aggregate supply function as well the difficulty arises in trying to measure and test the statistical significance of asset fixity in the aggregate supply function to illustrate for a situation of price reversal supclark edwards is an economist with the economic research service u s department of agriculture review was coordinated by peter berck associate editor

pricing vulnerable european options when the option s payoff can increase the risk of financial distress abstract we extend the results of johnson and stulz johnson h stulz r 1987 journal of finance 42 267 280 and klein klein p c 1996 journal of banking and finance 20 1211 1229 for valuing european options subject to the risk of financial distress on the part of the option writer our model incorporates a default boundary which depends on the potential liability of the written option as in johnson and stulz 1987 and also on the option writer s other liabilities as in klein 1996 as in both of these papers the pay out ratio in the event of financial distress is linked to the assets of the option writer and the correlation between the assets of the option writer and the asset underlying the option is explicitly modeled although no analytical solution is available we illustrate the importance of this approach through examples which are evaluated numerically we also develop an approximate analytical solution which works well in most situations

dynamic labour demand schedules for us agriculture labour in us agriculture is performed by diverse workers including farm operators unpaid family workers and hired workers who work anywhere from a few days per year to the entire year agricultural labour literature has drawn distinctions between these different types of workers but these distinctions are frequently ignored in input demand studies in recent studies seasonal and full time hired labour are invariably treated as a single input and hired labour is frequently aggregated with family operator labour this study maintains seasonal hired labour full time hired labour and family operator labour as three separate inputs and evaluates input substitutability and technical change in a dynamic framework empirical evidence of differences in demand characteristics for the three types of workers is presented

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

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

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

using trivariate copulas to model sample selection and treatment effects simultaneous nonlinear econometric models with discrete outcomes are often difficult to implement this article considers the use of the copula approach for a model with three jointly determined outcomes it also deals with the discrete case in which outcomes include a mixture of dichotomous choices and discrete count data we apply this technique to study self selection and interdependence between health insurance and health care demand among married couples the full model consists of a dichotomous choice equation for family insurance and a separate negative binomial equation for each spouse s health care use

valuing farmland with multiple quasi fixed inputs this study examines the impact of multiple quasi fixed assets on the imputed returns to farmland the results indicate that the presence of additional quasi fixed assets causes the true shadow value of farmland to deviate from its imputed value the results also indicate that when the potential existence of multiple quasi fixed assets is explicitly modelled the shadow value of farmland approaches reported cash rental values

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

analyzing comovements in housing prices using vine copulas i introduction when housing prices were rapidly appreciating from 1999 to 2006 investment firms created structured securities by combining mortgages from houses located in different parts of the country and then traders bought and sold those securities and also pieces of those securities called tranches in secondary markets the most familiar of those structured securities was the collateralized debt obligation cdo the main appeal of cdos rested in the belief that due to the localized nature of housing markets houses in separate geographic markets would be unlikely to simultaneously experience large decreases in prices credit rating agencies offered support to this thinking by awarding many cdos the highest possible safety rating however it soon became clear that cdos offered less diversified protection than originally thought when starting in 2006 housing prices in different geographic areas even those located far apart simultaneously plummeted in value as a consequence cdos lost much of their value with the global cdo market shrinking from 482 billion globally in 2007 to only 8 billion in 2010 1 in the wake of the housing crisis financial analysts and policy makers have questioned why compared to pre crisis expectations housing prices showed strong correlations across different geographic areas in addition a branch of research has emerged that attempts to identify sources of and quantify magnitudes of housing price comovements apergis and payne 2012 barros gil alana and payne 2012 the popular press quickly assigned blame to the statistical method used to analyze linkages between housing markets the gaussian copula li 2000 notably the march 2009 issue of the technology magazine wired featured an article on the gaussian copula entitled recipe for disaster the formula that killed wall street similar ideas have reached the general public through the works of nassim taleb taleb 2007 the gaussian copula became popular due in part to its link to the familiar multivariate normal distribution but the multivariate normal distribution has asymptotic independence such that events regardless of the strength of their correlation become independent if one pushes far enough into the tails embrechts mcneil and straumann 2002 thus in the midst of the housing crisis which might be thought of as a lower tail event the gaussian copula predicted near independence in price movements across different areas when in fact prices plummeted simultaneously throughout most of the united states but the gaussian copula s link to the normal distribution was not its only appeal perhaps a bigger reason for its popularity was that the gaussian copula much like the related normal distribution readily extends to higher dimensions certainly credit rating agencies were not considering simple bivariate movements between two locations but rather multivariate movements across many locations recent studies argue that alternative specifications especially copulas that depart from normality more accurately reflect correlations in housing price movements during extreme market swings ho huynh and jachochavez 2014 zimmer 2012 however those improved fits have been achieved only in bivariate models that compare housing price movements between two locations it remains an open question whether non gaussian copulas can accurately reflect housing price movements in higher dimensional settings unfortunately copulas other than the gaussian do not readily extend to higher than bivariate dimensions nelsen 2006 105 attempts to develop higher dimensional copulas some of which are discussed below either impose unrealistic restrictions or present difficulties when applied to data as an alternative this article develops multivariate models of housing price comovements based on vine copulas the approach requires marginal distributions which financial analysts should know with some certainty and bivariate copulas which have well understood statistical properties

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

how effective are sovereign bond backed securities as a spillover prevention device abstract brunnermeier et al 2017 propose the introduction of sovereign bond backed securities sbbs in the euro area it and other papers address how the securitisation would insulate senior security holders from actual default related losses this article generalises the assessment by using the var based diebold yilmaz 2012 spillover index methodology to assess potential attenuation of the spillover of shocks in holding period returns across asset markets from the introduction of sbbs this is made possible by employing sbbs yields estimated from historical euro area member state sovereign bond yields using monte carlo methods as described in schonbucher 2003 the econometric results show that i sbbs tranching protects senior sbbs holders by reducing the spillover of shocks from the higher risk peripheral member states to it ii spillovers from high risk sovereigns to a weighted portfolio are much higher than those to the senior sbbs iii a smaller junior sbbs tranche reduces spillover from it to the senior sbbs and iv rolling window analysis indicates that the spillover of shocks from the junior tranche to the senior tranche declines during a period of financial stress

m press creditrisk microprudential and macroprudential capital requirements for credit risk under systemic stress m press creditrisk is a novel stress testing approach that can help authorities gauge banks capital adequacy related to credit risk for the first time it combines the assessment of microprudential capital requirements under pillars 1 and 2 and macroprudential buffers in a unified coherent framework its core element is an advanced credit portfolio model systemiccreditrisk built upon a rich nonlinear dependence structure for correlated bank portfolios the model is applied to a sample of 12 systemically important german banking groups and delivers measures for systemic credit risk and the banks contributions to it in both baseline and stress scenarios

robust error specification in a production system economists estimating demand and supply systems face the question of using shares or quantities as dependent variables this article finds that inconsistent estimates are obtained if one makes the wrong choice a robust structure is presented to let the data choose the preferred form empirical applications to u s and texas agriculture using the generalized method of moments suggest that shares and quantities are rejected in favor of a more general functional form the texas application provides some evidence for fixed capital but not for labor copyright 2013 oxford university press

a dynamic adjustment model for u s agriculture 1948 79 abstract a multioutput model is developed within the adjustment cost framework to analyze the structure of dynamic adjustments in u s agriculture during the post war period an important feature of this model is that the econometric model is consistent with dynamic economic theory fluctuations in capital stocks variable inputs and outputs are explained by changing opportunity costs empirical results indicated that durable equipment farm produced durables and family labor exhibited significant rigidity in adjustment as a response to exogenous shocks surprisingly the hypothesis that real estate was a variable input could not be rejected the univariate flexible accelerator hypothesis which is widely maintained in most agricultural adjustment studies is inconsistent with the data

testing asset fixity for agriculture reply the observations made by lee and baumel lb on our previous effort appear to cast some doubt on the methodology employed to test the asset fixity hypothesis for u s agriculture as their criticism is of a fundamental nature we welcome the opportunity to address the points they raise to do so it is only proper at the outset to sort out the major charges leveled against the chambers and vasavada cv asset fixity study and analyze them in sequence the lb critique hinges on two types of objections these are a that the asset fixity hypothesis cannot be tested under constant returns to scale and b that the terms asset fixity and putty clay are not freely interchangeable as cv suppose the arguments advanced to justify these positions roughly adopt the following lines of reasoning under the cost minimization hypothesis constancy of inputoutput ratios under constant returns to scale is consistent with variation in both inputs and output hence rejection of the putty clay hypothesis does not necessarily imply rejection of asset fixity since putty clay merely requires constancy of inputoutput ratios while asset fixity requires no change in input quantities for example say labor output ratios are somehow optimally determined to be ten hours per bushel of corn then ex post price variation may keep this ratio unchanged while the actual labor and output quantities demonstrate some variation the second objection appears to take a broader view while not necessarily abandoning the constant returns to scale criticism that the asset fixity and putty clay hypotheses are not one and the same thing a graphical illustration of the behavior of a representative profit maximizing firm not a fixed output cost minimizing firm is provided to supplement this position of course since profits are unbounded under constant returns to scale lb point out that their illustration of the comparative static behavior does not adopt this assumption it would appear therefore from their arguments that not only is asset fixity untestable under constant returns to scale both under cost minimization and profit maximization but that any acceptable test procedure must invoke a distinction between the putty clay and asset fixity hypotheses our efforts to address these criticisms proceed in two stages first it is shown that the asset fixity hypothesis can be tested under the constant returns to scale assumption this lb contention is without theoretical or empirical content second the broader objection relating to distinguishing between characteristics of technology putty clay and economic responses asset fixity is discussed this discussion reveals no major inconsistency between the position taken by lb and cv their concept of asset fixity corresponds to the weaker form of asset fixity individual factor fixity tested in the original cv formulation our conclusions are noted in the final section and they justly reflect significantly greater optimism regarding the original cv study in comparison with those shared by lb

are market based measures of global systemic importance of financial institutions useful to regulators and supervisors we analyze whether four market based measures of the global systemic importance of financial institutions offer early warning signals during three financial crises the tests based on the 2007 2008 crisis show that only one measure covar consistently adds predictive power to conventional early warning models however the additional predictive power remains small and it is not normally confirmed for the asian and the 1998 crises we conclude that it is problematic to identify a market based measure of systemic importance that remains valid across crises with different features the same criticism also applies to several conventional proxies of systemic importance of which size is the most consistent performer

capital shortfall a new approach to ranking and regulating systemic risks the financial crisis of 2007 2009 has given way to the sovereign debt crisis of 2010 2012 yet many of the banking issues remain the same we discuss a method to estimate the capital that a financial firm would need to raise if we have another financial crisis this measure of capital shortfall is based on publicly available information but is conceptually similar to the stress tests conducted by us and european regulators we argue that this measure summarizes the major characteristics of systemic risk and provides a reliable interpretation of the past and current financial crises

labor market impacts of u s tight oil development the case of the bakken abstract there has been a recent boom in natural gas and oil production in the us due to high energy prices and technological advances in hydraulic fracturing and horizontal drilling while north dakota oil production has increased significantly since 2005 with the development of bakken formation the impact on the rest of the economy including agriculture historically the largest industry in north dakota has received little attention we employ a variant of the corden neary resource development model to test the impact of the oil boom in north dakota caused by technical change on employment and wages in two tradable sectors of the state economy agriculture and energy alongside the rest of the state s economy using a vector error correction vec model marking the very first use of the dynamic vector autoregression var analysis in this theoretical framework it was determined that the oil boom as represented by the number of rigs in the state led to an increase in employment and wages in energy sector as expected but also in the rest of the economy oil development activity had no significant impact on agricultural wages both energy sector equations employment and wage suggest relative independence of these variables from the movements in agriculture and the rest of the economy and being impacted mostly by the changes in energy sector itself seasonality does not play significant role in energy sector employment and wages unlike in agriculture and the rest of the economy

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

a dynamic multivariate heavy tailed model for time varying volatilities and correlations we propose a new class of observation driven time varying parameter models for dynamic volatilities and correlations to handle time series from heavy tailed distributions the model adopts generalized autoregressive score dynamics to obtain a time varying covariance matrix of the multivariate student t distribution the key novelty of our proposed model concerns the weighting of lagged squared innovations for the estimation of future correlations and volatilities when we account for heavy tails of distributions we obtain estimates that are more robust to large innovations we provide an empirical illustration for a panel of daily equity returns

pricing the risk of recovery in default with absolute priority rule violation abstract this paper proposes a simple approach to infer the risk neutral density of recovery rates implied by the prices of the debt securities of a firm the proposed approach is independent of modeling default arrival rates and allows for the violation of absolute priority rule the paper demonstrates that a new statistic the adjusted relative spread captures risk neutral recovery information in debt prices interest rates and firm tangible assets are shown to be significant determinants of the price of recovery an application illustrates the pricing of credit derivatives written on the realized recovery rate

estimating investment rigidity within a threshold regression framework the case of u s hog production sector this article addresses the issues of investment disinvestment asymmetry and a possible existence of a sluggish regime in the demand for a quasi fixed input in the u s hog production sector adopting a new threshold estimation procedure quarterly data from 1970 through 2002 are used to estimate a regimedependent investment demand equation for a quasi fixed input taking sows as a proxy the results support the existence of three regimes over alternative specifications precluding the sluggish regime confirming the existence of asset fixity in hog production the results also highlight the importance of accounting for investment rigidity when estimating hog supply and variable input demands the importance of the u s swine industry is far reaching and can be highlighted by its economic contribution to different sectors along the supply chain involving hog producers pork processors and consumers according to the national pork producers council nppc 2002 the industry supported an estimated 800 000 domestic jobs in 2002 and generated more than 72 billion in total domestic economic activities furthermore the united stated is a leading pork exporter with its exports valued at 1 5 billion in 2002 of the 72 billion worth of domestic economic activities receipts from hog sales account for more than 11 billion per year the hog sector also contributes an additional 27 billion from the utilization of corn soybean and other inputs nppc the structure of the hog production sector has changed dramatically during the past decade with large hog operations becoming increasingly dominant between 1994 and 2004 the proportion of hog operations with more than 2 000 hogs has doubled from 38 to 79 of all hogs

testing asset fixity for u s agriculture two problems which have concerned agricultural economists since the great depression are low farm resource returns and agriculture s tendency to maintain high aggregate production in the face of declining real product prices the latter phenomenon referred to as irreversibility of supply has spawned a significant literature on approaches to estimating and testing irreversible supply curves houck tweeten and quance while there are numerous explanations of these problems it is widely accepted that both are at least partially due to some asset fixity within agriculture that is in the aggregate there are certain productive factors which are trapped in agriculture attempts to explain asset fixity are not new galbraith and black early argued that high fixed costs contribute to a lumpiness of important factors which makes their temporary reduction or reorganization so expensive as to be unprofitable in the short run later g l johnson hypothesized that productive assets are trapped in agriculture because of a divergence between acquisition costs and salvage value formal developments are in edwards hathaway and johnson and quance both explanations have been challenged d g johnson concluded that available empirical evidence did not support galbraith and black s high fixed cost hypothesis he argued instead that the data were consistent with inelastic supply of agricultural inputs johnson and pasour criticized inferring asset fixity from a divergence between acquisition costs and salvage values they argued that the appropriate concept for investigating resource allocation is that of the resource s opportunity cost although they criticized g l johnson s fixed asset theory they still concluded that asset fixity theory can contribute toward an understanding of why the supply function whether firm or industry is not reversible

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

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

credit risk in private debt portfolios default loss severity and average loss rates for a large sample of privately placed bonds are presented and compared with loss experience for publicly issued bonds the chance of very large portfolio losses is estimated and some determinants of such losses are analyzed results show ex ante riskier classes of private debt perform better on average than public debt both diversification and the riskiness of individual portfolio assets influence the bad tail of the portfolio loss distribution private placements are similar to corporate loans in that both are monitored private debt the results are thus relevant to management and securitization of private debt portfolios generally more than half of nonfinancial corporate debt finance is iss ued privately and decisions of the financial intermediaries that invest in such debt depend importantly on its credit risk regulators of such institutions are similarly attentive to portfolio credit risk and it is an important consideration in the design of securitizations of pools of private debt in spite of its importance little is known empirically about private debt credit risk especially ex ante risk as a function of portfolio characteristics many studies have examined the loan portfolio performance of banks thrifts and insurance companies but the ex ante risk characteristics of the portfo

the effects of tax policy on investment in agriculture the effects of tax policy on agricultural investment are investigated by estimating a dynamic interrelated input demand system net investment is specified to give rise to increasing internal costs of adjustment resulting in capital inputs being quasi fixed the system of demand equations is derived by incorporating a quadratic normalized restricted cost function into a long run dynamic optimization framework copyright 1991 by mit press

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

an economic analysis of technology in the meat products industry the meat products industry underwent significant structural change during the last two decades the relocation and expansion of commercial cattle feeding stimulated development of new single species slaughtering facilities to replace older multi species plants an essentially new processing industry arose specializing in breaking and packaging carcasses this forward integration has significantly changed distribution methods of slaughtering and fabricating firms increased emphasis on coordination of inputs led to interest in backward integration from packing into cattle feeding the steer and heifer slaughtering sector which was decentralized and competitive in the 1950s has turned toward centralization and concentration although the largest firm accounted for only 13 of total u s steer and heifer slaughter in 1977 it had more than doubled its share since 1970 in 1978 this firm slaughtered more than twice as many steers and heifers as its nearest competitor in addi

dynamic input demand an application to agriculture a theoretically consistent analytical framework for examining dynamic agricultural input demand is developed and applied results from duality theory on restricted variable profit functions are incorporated into a long run dynamic optimization framework input use is affected by external adjustment costs which permits sluggish factor adjustment

risk analysis of collateralized debt obligations collateralized debt obligations which are securities with payoffs that are tied to the cash flows in a portfolio of defaultable assets such as corporate bonds play a significant role in the financial crisis that has spread throughout the world insufficient capital provisioning due to flawed and overly optimistic risk assessments is at the center of the problem this paper develops stochastic methods to measure the risk of positions in collateralized debt obligations and related instruments tied to an underlying portfolio of defaultable assets it proposes an adaptive point process model of portfolio default timing a maximum likelihood method for estimating point process models that is based on an acceptance rejection resampling scheme and statistical tests for model validation to illustrate these tools they are used to estimate the distribution of the profit or loss generated by positions in multiple tranches of a collateralized debt obligation that references the cdx high yield portfolio and the risk capital required to support these positions

analysis of banks systemic risk contribution and contagion determinants through the leave one out approach abstract in this paper we develop an in depth analysis of the systemic risk and contagion determinants through the differential effects of excluding one bank on the banking system the measure allows for splitting the contribution of individual banks into systemic risk as the sum of two components the stand alone bank risk and the contagion risk and measuring the role of assets riskiness capitalization and interconnectedness as determinants of each of the two components results show that the variables determining the stand alone risk component are different from those determining the contagion risk component so that a bank which is relatively safe with respect to stand alone risk can be an important contagion vehicle or vice versa results also show that crisis severity significantly affects results so that the severity of different crises results in different weights for the input variables and different contributions for the banks considered these results add highly significant information for macroprudential regulation not only from the cross sectional point of view but also with reference to the time dimension

asset market linkages in crisis periods we characterize asset return linkages during periods of stress by an extremal dependence measure contrary to correlation analysis this nonparametric measure is not predisposed toward the normal distribution and can allow for nonlinear relationships our estimates for the g 5 countries suggest that simultaneous crashes between stock markets are much more likely than between bond markets however for the assessment of financial system stability the widely disregarded cross asset perspective is particularly important for example our data show that stock bond contagion is approximately as frequent as flight to quality from stocks into bonds extreme cross border linkages are surprisingly similar to national linkages illustrating a potential downside to international financial integration

uniform and non uniform second best input taxes we investigate second best input based taxes foragricultural nonpoint pollution control when marketprices are endogenous and production isheterogeneous theoretically we derive the optimalforms of taxes which take account of heterogeneity non uniform taxes and a tax which does not auniform tax empirically we use a multi factor market equilibrium simulation model to determineoptimal tax rates and associated equity effects particularly differences in landowner gains lossesacross a heterogeneous region when market prices areendogenous second best tax policies result inpecuniary externalities that affect existingenvironmental externalities in particular thepecuniary externalities amplify the effect of producerheterogeneity on determination of sub regionaldifferences in tax rates and returns to land particularly for the uniform policy with endogenousprices the uniform tax rate is considerably higherthan any of the non uniform rates and ironically thenon uniform taxes result in less dispersion oflandowner gains across sub regions than the uniformtax

the excess co movement of commodity prices reconsidered this paper provides an empirical reconsideration of evidence for excess co movement of commodity prices within the framework of univariate and multivariate garch 1 1 models alternative formulations of zero excess co movement are provided and corresponding score and likelihood ratio tests are developed monthly time series data for two sample periods 1960 85 and 1974 92 on up to nine commodities are used in contrast to earlier work only weak evidence of excess co movement is found

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

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

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

investment in u s agriculture resource adjustment problems in u s agriculture are motivated against the background of the farm problem the adjustment cost hypothesis is invoked to specify and estimate consistently a system of dynamic investment demand and output supply equations by utilizing recent advances in dynamic duality theory the investment demand equations assume the form of a multivariate flexible accelerator results indicate that labor capital services and land exhibited quasi fixity while intermediate materials were a variable factor this can be construed as a form of asset fixity within aggregate u s agriculture the univariate flexible accelerator hypothesis is rejected

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

risk endogeneity at the lender investor of last resort abstract to what extent can a central bank influence its own balance sheet credit risks during a financial crisis through unconventional monetary policy operations to study this question we develop a risk measurement framework to infer the time variation in portfolio credit risks at a high weekly frequency focusing on the eurosystem s experience during the euro area sovereign debt crisis between 2010 and 2012 we find that the announcement and implementation of unconventional monetary policy operations generated beneficial risk spill overs across policy portfolios this caused overall risk to be nonlinear in exposures in some instances the eurosystem reduced its overall balance sheet credit risk by doing more in line with bagehot s well known assertion that occasionally only the brave plan is the safe plan

an opportunity cost view of fixed asset theory and the overproduction trap in fixed asset and exit barrier theories durable asset valuation is based upon acquisition prices yielding downwardly biased rate of return estimates and erroneous implications that excess resources become trapped in production when product price expectations fall conventional asset valuation based on opportunity cost shows that excess resource applications are incompatible with rational producer behavior market failure conclusions of overproduction trap models are shown to be unfounded a review of recently published agricultural economics texts illustrates how use of fixed asset theory in the college classroom obscures the concept of choice influencing cost and the rule of resource allocative efficiency

coupling couples with copulas analysis of assortative matching on risk attitude we investigate patterns of assortative matching on risk attitude using self reported ordinal data on risk attitudes for males and females within married couples from the german socio economic panel over the period 2004 2012 we apply a novel copula based bivariate panel ordinal model estimation is in two steps first a copula based markov model is used to relate the marginal distribution of the response in different time periods separately for males and females second another copula is used to couple the males and females conditional on the past distributions we find positive dependence both in the middle of the distribution and in the joint tails and we interpret this as positive assortative matching pam hence we reject standard assortative matching theories based on risk sharing assumptions and favor models based on alternative assumptions such as the ability of agents to control income risk we also find evidence of assimilation that is pam appearing to increase with years of marriage jel c33 c51 d81