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

shadow banking and the financial side of financialisation this paper tries to shed some light on the nature and functioning of shadow banking with a special focus on its role in the evolution of financialization as well as in sharpening income and wealth inequality on the one hand it discusses how securitization has allowed traditional banks to expand their business providing the financial system with the raw materials for the manufacturing of complex structured financial products on the other hand it questions the view of traditional and shadow banks as two parallel and alternative systems claiming that financialization did not alter the role of commercial banks as money creators but rather diverted endogenously created money to the financial sphere feeding its expansion finally our work discusses some policy options for the de financialization of the economy through more progressive taxation of the financial sector as well as a stronger engagement to reduce income and wealth inequality

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

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

meaning and credibility in cheap talk games i define neologism proofness a refinement of perfect bayesian equilibrium in cheap talk games it applies when players have a preexisting common language so that an unexpected message s literal meaning is clear and only credibility restricts communication i show that certain implausible equilibria are not neologism proof in some games no equilibrium is journal of economic literature classification numbers d83 d82 c73

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

globalisation as commodification while recognising that most pre capitalist formations exhibited elements of commodity exchange marx argued that capitalism differentiates itself as a genuine commodity system by virtue of two interdependent processes having reached a critical stage of development a stretching of commodity relations to the point where production for the market displaces subsistence production as the primary form and a deepening of commodity relations such that these encompass not only goods and services but the capacities for producing them this paper argues that globalisation can best be understood as the culminating stage of these stretching and deepening processes the former in the sense that commodity relations now embrace the entire planet and the latter in the sense that they cover not merely goods or the capacities for producing goods but also every other type of capacity and every other type of outcome copyright 2005 oxford university press

varieties of capitalism in the twentieth century of the world s multiple national variations on a basically capitalist system the paper compares the century s history of four the british and american the two pioneers whose institutions and economic behaviour patterns most closely confirm to and those of germany and japan whose institutions most significantly deviate from the prescriptions of neoclassical textbooks there is no obvious story of a long and steady process of gradual convergence capitalist rationality slowly washing out the effects of differing cultural traditions all four societies have changed in key respects finance and corporate control structures were arguably more similar in the 1920s than later by the end of the post war golden age there were signs of convergence on similar forms of managerial capitalism the crucial and for us unpredictable question is how far the transition to shareholder capitalism in britain and america over the last two decades will be duplicated in germany and japan copyright 1999 by oxford university press

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

sand in the wheels or spanner in the works the tobin tax and global finance this paper presents a radical critique of the tobin tax a tax on currency transactions by undercutting certain assumptions about the size and character of the world s foreign exchange markets which furnish the tax with its basic rationale while it is acknowledged that only a fraction of the massive volumes of fx transactions relate directly to trade in goods and services or to cross border investments it is denied that all the residual transactions are motivated purely by exchange rate considerations speculative or hedging activities rather the argument is that a significant proportion of fx trades have money market characteristics and that these trades together with domestic money market transactions play an important role in the day to day operation of the global financial system this perspective is used to show that the imposition of a tobin tax would cause extensive material damage to the system with consequences that may run counter to the expectations of supporters of the tax

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

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

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

book reniewstabilizing an unstable economy hyman p minsky a twentieth century fund report yale university press new haven and london pp xiv 353 35 00 cloth 14 95 paper

the myth of economic globalization geographic patterns of commodity trade and foreign direct investment are not consistent with the proposition that european economies are experiencing a process of increasing globalisation internationalisation is taking place as economic integration within the european union during the last 35 years the european union has not become relatively more integrated with the world s other trade blocs moreover in contrast to what globalisation theory might cause us to predict the share in foreign direct investment taken by low wage countries shows little growth we try to explain such findings using arguments about the nature of the process of technological change

evolving discretionary practices of u s antidumping activity using data on u s dumping margin calculations by the u s department of commerce usdoc we first document the rapid rise in u s dumping margins from around 15 in the early 1980s to over 60 by 2000 second statistical analysis finds that usdoc discretionary practices have played the major role in rising u s dumping margins over this period importantly the evolving effect of discretionary practices is due not only to increasing use of these practices over time but to apparent changes in implementation of these practices that mean a higher increase in the dumping margin whenever they are applied utilisant des donnees sur le calcul de l ecart entre les prix aux etats unis et les prix de ces biens dans leur marche national d origine dumping margin calcules par le u s department of commerce usdoc on montre que ces marges sont passees d environ 15 au debut des annees 80 a plus de 60 en l an 2000 une analyse statistique suggere que les pratiques discretionnaires du usdoc ont joue un role important dans l accroissement de ces marges au cours de la periode cela n est pas attribuable seulement a l accroissement de ces pratiques dans le temps mais aux changements apparents dans la mise en application de ces pratiques qui se sont traduits par un accroissement de la marge quand on choisit de l appliquer

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

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

rent seeking protectionism and innovation in the american steel industry trade protection in a declining industry can cause damages beyond those revealed in the usual trade diagram analysis using data on the us steel firms we show that trade protection in that industry rewards poor performance reduces incentives to innovate and frustrates the normal schumpeterian process of creative destruction free trade gives consumers the lowest prices nonetheless protectionism in various guises is pervasive this we show is probably due to political rentseeking by groups that expect to lose as trade patterns adjust to innovation and altered economic conditions these groups invest in political lobbying to secure future returns in trade protection we find empirical evidence that trade protection returns private benefits to the shareholders senior workers and ceo s of lobbying firms perhaps more disturbingly trade protection also appears to reward less innovative firms and may thus frustrate the schumpeterian development of an industry we examine us steelmakers among the most active lobbyers in recent decades steel firms that lobby congress for protection tend to be larger older less diversified and less profitable than non lobbyers they pay their workers and ceos more and their ceos have longer tenure and are more likely to have risen through the ranks of their companies this suggests the owners managers and workers of less dynamic steel firms stand to lose from free trade the announcement of protection raises the stock prices of us steelmakers but by much more for lobbyers than non lobbyers when comprehensive and enduring protection was finally announced lobbyers more than non lobbyers cut jobs while maintaining or possibly increasing wages once comprehensive protection is in place protection also leads to large pay increases for lobbyers ceos this seems consistent with rent seeking and inconsistent with protection helping lobbyers mitigate social consequences of downsizing like unemployment our most striking finding is that high past r d spending is negatively correlated with stock price changes when proteption is announced and positively correlated with subsequent exit from the industry this seems inconsistent with protection providing a hiatus for retooling rather it suggests

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

antidumping and retaliation threats abstract we propose and test two ways in which retaliation threats may dampen the antidumping ad activity we observe first the threat of retaliatory ad actions may make a domestic industry less likely to name a foreign import source in an ad petition second the prospect of a gatt wto trade dispute may make government agencies less likely to rule positive in their ad decision using a nested logit framework we find evidence that both retaliation threats substantially affect us ad activity from 1980 through 1998

communication between rational agents abstract conventional game theoretic solution concepts never guarantee meaningful communication in cheap talk games i define a solution concept which does guarantee communication in some games i assume full rationality without imposing equilibrium conditions but add a natural behavioral assumption about how agents use language agents have a propensity to speak the truth and to believe others speak the truth but use the game s strategic incentives to check whether such behavior and beliefs are rational i also define and prove the existence of an equilibrium version of the concept and present examples where its predictions seem more natural than farrell s neologism proof equilibrium

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

the market and exploitation in marx s economic theory a reinterpretation adopting the view that marx s notion of commodity has a wider reach than is usually supposed and that it is this notion rather than a labour theory of value that is the cornerstone of his economic theory this paper shows that marx s account of capitalist exploitation is one that accords equal priority to the production and market domains central to this demonstration is an unorthodox explanation as to why marx posits two alternative rules of prices in capital copyright 2000 by oxford university press

american government finance in the long run 1790 to 1990 government in america has gone through three distinct fiscal systems in the last two hundred years each system utilized a dominant revenue source and had a distinctly active level of government the changing structure of government by level seems to be related to changing revenue structures when new taxes become important the relative importance of each level of government changes on the other hand growth in the overall size of government is not directly related to the structure of revenues or the distribution of activity by level of government government growth is the result of long term commitments to provide education transportation social welfare services old age security and military forces

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

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

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

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

antidumping signaling and cheap talk abstract in the united states there is evidence that domestic non filing firms do not always support dumping countervailing duty investigations absent other factors domestic firms have an unambiguous incentive to support petitions filed by other domestic producers we argue that in cases where the non complainant firm is not a significant importer or exporter the most plausible explanation is that non support acts as a costly signal of private information extending the model to allow firms to engage in cheap talk such signaling can take place even in the absence of an investigation this result provides an explanation for the puzzling observation that fewer antidumping investigations are filed than one would expect