consistent modeling of s p 500 and vix derivatives abstract this study introduces a model that identifies relationships between stylized features on s p 500 vix and derivatives on vix the paper considers a specification with discontinuous correlated jumps in stock prices and stock price volatility with state dependent arrival intensity and examines how these factors impact vix option pricing and hedging the paper finds strong evidence for jumps in volatility and jumps in returns implicit in vix option data

labor market returns to two and four year college the paper examines labor market returns to a two and four year college education analysis of the 1972 national longitudinal survey of youth observation that the average person who attended a two year college earned about 10 percent more than those without any college education comparison with the wages of those who attended a four year college education

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

hedging the black swan conditional heteroskedasticity and tail dependence in s p500 and vix the recent financial crisis has accentuated the fact that extreme outcomes have been overlooked and not dealt with adequately while extreme value theories have existed for a long time the multivariate variant is difficult to handle in the financial markets due to the prevalent heteroskedasticity embedded in most financial time series and the complex extremal dependence that cannot be conveniently captured by a single structure moreover most of the existing approaches are based on a limiting argument in which all variables become large at the same rate in this paper we show how the conditional approach of heffernan and tawn 2004 can be implemented to model extremal dependence between financial time series we use a hedging example based on vix futures to demonstrate the flexibility and superiority of the conditional approach against the conventional ols regression approach

credit risk measurement developments over the last 20 years abstract this paper traces developments in the credit risk measurement literature over the last 20 years the paper is essentially divided into two parts in the first part the evolution of the literature on the credit risk measurement of individual loans and portfolios of loans is traced by way of reference to articles appearing in relevant issues of the journal of banking and finance and other publications in the second part a new approach built around a mortality risk framework to measuring the risk and returns on loans and bonds is presented this model is shown to offer some promise in analyzing the risk return structures of portfolios of credit risk exposed debt instruments

measuring quantile risk hedging effectiveness a go garch evt copula approach in this study we propose a new go garch evt copula combined approach to estimate minimum quantile risk hedge ratios we examine the hedging effectiveness of the proposed model in comparison with t

measuring banks liquidity risk an option pricing approach abstract this paper proposes a new approach to evaluating banks liquidity needs which is not only well grounded theoretically but is also easy to apply practically within the framework of a global game with imperfect information we first establish a boundary condition for bank runs and show that there exists a unique nash equilibrium for bank runs using the option pricing approach we then obtain a closed form formula for the value of bank equity with both run risk and insolvency risk finally a bank s optimal liquidity ratio is derived by maximizing the value of bank equity using data on chinese listed banks we show that the deviation of the actual liquidity ratio from the optimal liquidity ratio in a bank represents a robust proxy for its liquidity risk an increased liquidity shortfall leads to worsening liquidity problems and this is particularly pronounced when the liquidity shortfall is high

jump and volatility risk premiums implied by vix abstract an estimation method is developed for extracting the latent stochastic volatility from vix a volatility index for the sp 2 the jump and volatility risks are priced 3 the popular square root stochastic volatility process is a poor model specification irrespective of allowing for price jumps or not our simulation study shows that statistical inference is reliable and not materially affected by the approximation used in the vix index construction

changes in the male female wage gap 1976 85 this study uses detailed information on work experience tenure and on the job training collected in the 1976 and 1985 questionnaires of the panel study of income dynamics to account for changes in wage differentials between white men and white women over these nine years decompositions of changes in the wage gap are used to illustrate the contribution of individual factors between 1976 and 1985 the wage gap between white men and women narrowed by approximately 4 percent this study finds that nearly 50 percent of this reduction was due to average changes in job tenure and other work history variables over this period

contagion risk in the australian banking and property sectors abstract the australian banking system emerged from the global crisis virtually unhurt with most banks still profitable adequately capitalized and with aa credit ratings are there any risks or vulnerabilities in this success story this paper analyzes australia s systemic banking risk and attempts to determine if this risk increased with the recent global crisis and whether this risk is related to the downturn experienced in the real estate market we use extreme value theory to measure banks and property firms univariate value at risk as well as multivariate intra sector and inter sector contagion risks of the 13 sectors analyzed we find that the property sector exhibits the highest level of extremal dependence with the banking sector the credit crisis significantly increased the probability of a bank or property firm crashing moreover contagion risks significantly increased not only within the banking and property sectors but also between those sectors

alternative bankruptcy prediction models using option pricing theory abstract we examine the empirical properties of the theoretical black scholes merton bsm bankruptcy model we evaluate the predictive ability of various existing modifications of the bsm model and extend prior studies by estimating volatility directly from market observable returns on firm value we show that parsimonious models using our direct market observable volatility estimate perform better than alternative more sophisticated models our findings suggest the adoption of simpler modelling approaches relying on market data when implementing the bsm model

is gender pay discrimination on the wane evidence from panel data 1968 1989 previous studies of the gender pay gap in the united states have found a narrowing of that gap in the past two decades but have differed substantially in the reported magnitude of that change this study calculates gender earnings differences using panel study of income dynamics data for 1968 89 a longer time series than has been examined by any similar study it also employs improved statistical techniques notably an adjustment for selection bias and a recently recommended modification of the most commonly used decomposition technique the author finds a significant decline both in the portion of the differential due to observed differences between men s and women s characteristics and in the unexplained component which is often attributed to discrimination the results of one analysis show that over the 1968 89 period the gender pay gap narrowed to as little as 47

why the gender gap in wages narrowed in the 1980s since 1976 the gender gap in wages on average declined by about 1 per year this article focuses on identifying the factors underlying this trend three data sets are analyzed the current population survey the panel study of income dynamics and the national longitudinal survey we find that convergence in measurable work related characteristics schooling and work experience explains one third to one half the narrowing the remainder is attributable to a relative increase in women s returns to experience as well as to declining wages in blue collar work and other factors

education decisions and labour market outcomes the financial return to a college degree is an increasing concern amid rising tuition costs and stagnant wages using the education longitudinal study of 2002 els 2002 i analyse the effect of po

us presidential elections and implied volatility the role of political uncertainty abstract this paper focuses on the effects of political uncertainty and the political process on implied stock market volatility during us presidential election cycles using monthly iowa electronic markets data over five elections we document that stock market uncertainty as measured by the vix volatility index increases along with positive changes in the probability of success of the eventual winner the association between implied volatility and the election probability of the eventual winner is positive even after controlling for changes in overall election uncertainty these findings indicate that the presidential election process engenders market anxiety as investors form and revise their expectations regarding future macroeconomic policy

multiple criteria decision aiding for finance an updated bibliographic survey finance is a popular field for applied and methodological research involving multiple criteria decision aiding mcda techniques in this study we present an up to date bibliographic survey of the contributions of mcda in financial decision making focusing on the developments during the past decade the survey covers all main areas of financial modeling as well as the different methodological approaches in mcda and its connections with other analytical fields on the basis of the survey results we discuss the contributions of mcda in different areas of financial decision making and identify established and emerging research topics as well as future opportunities and challenges

community college enrollment college major and the gender wage gap the literature on the narrowing of the gender wage gap during the 1980s considers among other factors the closing of the male female differential in post secondary education this paper looks specifically at the role played by the dramatic relative increase in women s enrollment in two year colleges with independent cross sections developed using nlsy data the authors find that the gender wage gap narrowed by 0 0469 log points between 1985 and 1990 and by 0 0932 log points between 1989 and 1994 the more pronounced decrease observed for 1989 94 is largely explained by erosion of male female differences in weeks worked job tenure and full time employment a more novel finding is evidence that while change in the quantity of education provides essentially no explanatory power disaggregating education by two year and four year providers and by major field of study accounts for 8 5 11 of the closing of the wage gap over the 1989 94 period

the impact of diverse measures of default risk on uk stock returns a number of recent papers examine the relationship between default risk and equity returns and the results are mixed these studies employ different measures of default risk and we find that correlations between eight diverse measures of default risk tend to be less than 50 nonetheless we find that the relationship between stock returns and diverse measures of default risk tends to be consistent default risk is a significant determinant of stock returns and this relationship is hump backed as predicted by garlappi and yan 2011

a microcredit contract model with a black scholes model under default risk microfinance has emerged as a new promise for alleviating poverty and improving the limited access to financial services by offering small loans with no pledged collateral requirement to the poor due to the unique features of microfinance the credit relationship between the lender and the borrower is considered to be the foundation of the business based on the concept of supply chain microfinance this paper develops scenario based stochastic microcredit contract models for a group case in order to obtain a minimum interest rate a black scholes debt model estimates volatility directly from market observable returns on a borrower s equity next incorporating the minimum interest rate the stochastic microcredit models are developed to calculate a proper interest rate while maintaining the financial sustainability of a corporation the stochastic microcredit models also include financial statement analysis through financial ratios to reflect the microfinance business environment through the comparison of the effect of cash flow bullwhip this study illustrates that the proposed model has the potential to decrease the bullwhip effect by determining a proper interest rate in microcredit the proposed models could be used by microfinance institutions as an effective credit risk tool

the relationship between default prediction and lending profits integrating roc analysis and loan pricing abstract in evaluating credit risk models it is common to use metrics such as power curves and their associated statistics however power curves are not necessarily easily linked intuitively to common lending practices bankers often request a specific rule for defining a cut off above which credit will be granted and below which it will be denied in this paper we provide some quantitative insight into how such cut offs can be developed this framework accommodates real world complications e g relationship clients we show that the simple cut off approach can be extended to a more complete pricing approach that is more flexible and more profitable we demonstrate that in general more powerful models are more profitable than weaker ones and we provide a simulation example we also report results of another study that conservatively concludes a mid sized bank might generate additional profits on the order of about 4 8 million per year after adopting a moderately more powerful model

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

extreme dependence with asymmetric thresholds evidence for the european monetary union abstract existing papers on extreme dependence use symmetrical thresholds to define simultaneous stock market booms or crashes such as the joint occurrence of the upper or lower one percent return quantile in both stock markets we show that the probability of the joint occurrence of extreme stock returns may be higher for asymmetric thresholds than for symmetric thresholds we propose a non parametric measure of extreme dependence which allows capturing extreme events for different thresholds and can be used to compute different types of extreme dependence we find that extreme dependence among the stock markets of ten initial emu member countries the united kingdom and the united states is largely asymmetrical in the pre emu period 1989 1998 and largely symmetrical in the emu period 1999 2010 our findings suggest that ignoring the possibility of asymmetric extreme dependence may lead to an underestimation of the probability of co booms and co crashes

combining accounting data and a structural model for predicting credit ratings empirical evidence from european listed firms abstract ratings issued by credit rating agencies cras play an important role in the global financial environment among other issues past studies have explored the potential for predicting these ratings using a variety of explanatory factors and modeling approaches this paper describes a multi criteria classification approach that combines accounting data with a structural default prediction model in order to obtain improved predictions and test the incremental information that a structural model provides in this context empirical results are presented for a panel data set of european listed firms during the period 2002 2012 the analysis indicates that a distance to default measure obtained from a structural model adds significant information compared to popular financial ratios nevertheless its power is considerably weakened when market capitalization is also considered the robustness of the results is examined over time and under different rating category specifications

credit rating industry a helicopter tour of stylized facts and recent theories the recent subprime crisis and the ongoing euro zone crisis have generated an enormous interest in the credit rating industry not only among economists but also among average citizens as a consequence we have seen an explosion of the economic literature on the industry the objective of this survey is to introduce readers to the key stylized facts of the credit rating industry and to the recent theoretical economic literature on this industry

swimming upstream trends in the gender wage differential in the 1980s using michigan panel study of income dynamics data for 1979 and 1988 we analyze how a falling gender wage gap occurred despite changes in wage structure unfavorable to low wage workers the decrease is traced to gender specific factors which more than counterbalanced changes in measured and unmeasured prices working against women supply shifts net of demand were unfavorable for women generally and hurt high skilled more than middle and low skilled women by analyzing wages we find support for the notion of a gender twist in supply and demand having its largest negative effect on high skilled women

the surface of implied firm s asset volatility abstract this paper analyzes the surface of cds implied firm s asset volatility at the aggregate market level using a sample of european investment grade firms during the 2007 2014 period the term structure of asset implied volatilities is backed out from the term structure of cds spreads while the moneyness dimension is proxied by the ratio of the default barrier to asset value we find both a downward sloping term structure and a negative skew principal component analysis on the entire volatility surface shows that the first four components interpreted as a level a term structure a skew and a moneyness related curvature mode capture 86 of the daily variation in asset implied volatility we also find that the term structure slope is related to market and funding illiquidity investors risk aversion informational frictions demand supply factors and momentum

the dark side of global integration increasing tail dependence abstract we measure stock market coexceedances using the methodology of cappiello gerard and manganelli 2005 ecb working paper 501 this method enables us to measure comovement at each point of the return distribution first we construct annual coexceedance probabilities for both lower and upper tail return quantiles using daily data from 1974 2006 next we explain these probabilities in a panel gravity model framework results show that macroeconomic variables asymmetrically impact stock market comovement across the return distribution financial liberalization significantly increases left tail comovement whereas trade integration significantly increases comovement across all quantiles decreasing exchange rate volatility results in increasing lower tail comovement the introduction of the euro increases comovement across the entire return distribution thereby significantly reducing the benefits of portfolio diversification within the euro area

economic benefit of powerful credit scoring abstract we study the economic benefits from using credit scoring models we contribute to the literature by relating the discriminatory power of a credit scoring model to the optimal credit decision given the receiver operating characteristic roc curve we derive a the profit maximizing cutoff and b the pricing curve using these two concepts and a mixture thereof we study a stylized loan market model with banks differing in the quality of their credit scoring model even for small quality differences the variation in profitability among lenders is large and economically significant we end our analysis by quantifying the impact on profits when information leaks from a competitor s scoring model into the market

a study of credit risk of chinese listed companies zpp versus kmv abstractthe zero price probability zpp model is applied to evaluate the credit risk of listed companies in china and its performance is compared to that of the kealhofer mcquown vasicek kmv model the sample includes 34 financially distressed companies and a comparison group of 34 financially healthy companies the performances of zpp and kmv models are compared using various descriptive statistics and statistical tests the empirical analyses show that the zpp model is superior to the kmv model in terms of discriminatory power compared to the kmv model the zpp model performs much better in distinguishing between financially challenged and healthy firms among different specifications of the zpp model the naive constant variance zero price probability model outperforms those with generalized autoregressive conditional heteroskedasticity specifications this article is among the very first studies that provide evidence on the performance of the zpp model

a remark on lin and chang s paper consistent modeling of s p 500 and vix derivatives abstract lin and chang 2009 lin and chang 2010 establish a vix futures and option pricing theory when modeling s p 500 index by using a stochastic volatility process with asset return and volatility jumps in this note we prove that lin and chang s formula is not an exact solution of their pricing equation more generally we show that the characteristic function of their pricing equation cannot be exponentially affine as proposed by them furthermore their formula cannot serve as a reasonable approximation using the heston 1993 model as a special case we demonstrate that lin and chang formula misprices vix futures and options in general and the error can become substantially large

recovery rates default probabilities and the credit cycle in recessions the number of defaulting firms rises on top of this the average amount recovered on the bonds of defaulting firms tends to decrease this paper proposes an econometric model in which this joint time variation in default rates and recovery rate distributions is driven by an unobserved markov chain which we interpret as the credit cycle this model is shown to fit better than models in which this joint time variation is driven by observed macroeconomic variables we use the model to quantitatively assess the importance of allowing for systematic time variation in recovery rates which is often ignored in risk management and pricing models

point process models for extreme returns harnessing implied volatility forecasting the risk of extreme losses is an important issue in the management of financial risk there has been a great deal of research examining how option implied volatilities iv can be used to forecast asset return volatility however the role of iv in the context of predicting extreme risk has received relatively little attention the potential benefit of iv in forecasting extreme risk is considered within a range of models beginning with the traditional garch based approach along with a number of novel point process models univariate models where iv is included as an exogenous variable are considered along with a novel bivariate approach where extreme movements in iv are treated as another point process it is found that in the context of forecasting value at risk the bivariate models produce the most accurate forecasts across a wide range of scenarios

honest certification and the threat of capture abstract this paper derives conditions under which reputation enables certifiers to resist capture these conditions alone have strong implications for the industrial organization of certification markets 1 honest certification requires high prices that may even exceed the static monopoly price 2 honest certification exhibits economies of scale and constitutes a natural monopoly 3 price competition tends to a monopolization the results derive from a general principle of reputation models that favors concentration this principle implies benefits from specialization and explains specialized certifiers as efficient market institutions that sell reputation as a service to other firms

futures price variability a test of maturity and volume effects a number of previous studies have examined the contemporaneous relation between asset price variability and volume traded for example clark 1973 cornell 1981 and tauchen and pitts 1983 have investigated this relation for futures markets and epps and epps 1976 harris 1984a 1984b and smirlock and starks 1984 for the stock market underlying this empirical research is a theoretical framework that suggests that price variability or the absolute change in prices and volume traded should be positively correlated according to this theoretical framework the so called mixture of distributions hypothesis mdh 1 the correlation between price variability and volume should be positive because of joint dependence on a common directing variable or event this study uses contract disaggregated data on futures prices to obtain evidence on the relation between price variability and volume of trading strong positive contemporaneous correlations between trading volume and price volatility are documented consistent with the mixture of distributions hypothesis it is concluded that maturity is not a suitable surrogate for the common directing variable specifically while maturity has a strong effect on volume no such relation is found for price variability finally while in the majority of cases price variability and trading volume are contemporaneously correlated there are a significant number of cases in which a sequential relation appears to be present an earlier version of this paper was presented at the 1984 meeting of the european finance association in manchester england and at southern methodist university the university of wisconsin madison duke university mcgill university and the university of toronto we wish to thank the seminar participants and an anonymous referee from this journal for constructive comments and criticism all remaining errors are of course our responsibility we would also like to thank the columbia center for the study of futures markets and the interactive data corp for providing some of the data used in the study 1 see clark 1973 and harris 1984a 1984b

using privileged information to manipulate markets insiders gurus and credibility access to private information is shown to generate both the incentives and the ability to manipulate asset markets through strategically distorted announcements the fact that privileged information is noisy interferes with the public s attempts to learn whether such announcements are honest it allows opportunistic individuals to manipulate prices repeatedly without ever being fully found out this leads us to extend sobel s 1985 model of strategic communication to the case of noisy private signals our results show that when truthfulness is not easily verifiable restrictions on trading by insiders may be needed to preserve the integrity of information embodied in prices

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