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

drexel burnham lambert s bankruptcy and the subsequent decline in underwriter fees abstract in the 1980s drexel burnham lambert dominated the underwriting of junk bonds with close to a 50 market share in 1990 drexel went bankrupt and was liquidated and the percentage underwriting fees for junk bonds subsequently dropped dramatically we present strong evidence that the exit of drexel burnham lambert and the resulting increase in competition for market share were major contributing factors to the decline in junk bond underwriter fees

foreign aid an instrument for fighting communism abstract in this paper we test the argument that the sizeable reduction in aggregate aid levels in the 1990s was due to the end of the cold war we test two different models using a dynamic econometric specification on a panel of 17 donor countries spanning the years 1970 97 we find aid to be positively related to military expenditures in the former eastern bloc during the cold war but not in the 1990s suggesting that the reductions in aid disbursements are driven by the disappearance of an important motive for aid we also study the effect on aid allocation but here we do not find any robust effects of the end of the cold war

evaluating the evidence on union employment and wages using current population survey data for the years 1973 86 this study tests the hypothesis that the steep decline of union employment shares since 1973 is related to increases in union wages relative to nonunion wages the authors show that although the aggregate union wage premium has changed little since 1973 some industry specific premiums have risen substantially and the industries with the rising premiums are those experiencing declines in union employment shares the increase in the premium explains from 21 to 64 of the decline in union shares depending on the equation specification the paper also presents a detailed set of union wage premiums and employment shares for the sample period

motivations for aid to developing countries abstract this paper attempts to identify the underlying principles of aid allocation and particularly the balance of motivations as between the needs of recipient countries and the interests of donor countries two alternative models are fitted by cross country regressions to bilateral and multilateral aid flows to some 80 developing countries in 1969 1970 and 1978 1980 the first recipient need model assumes that all aid is given to compensate for shortfalls in domestic resources this model provides a reasonable explanation for the distribution of multilateral aid but it is clearly not applicable for bilateral aid flows the second donor interest model assumes that all aid serves only donor interests defined to cover political security investment and trade interests this model gives generally good explanations of bilateral aid but is a poor fit for multilateral aid the relative importance of the various donor interests differs sharply among donors the paper ends with an analysis of the shift in the balance of aid over the 1970s towards the recipient need element and with a reference to the sharp change in policy in the 1980s towards increasing emphasis on donor interest aid

does aid availability affect effectiveness in reducing poverty a review article this paper addresses the impact of aid supply on aid effectiveness first we review theoretical literature that deals with the problem of governance in donor recipient relationships and are susceptible of highlighting effects of aggregate aid availability second we provide a conceptual framework that explicitly incorporates a trade off between considerations of needs and governance we examine the impact of aid supply on the manner in which a donor agency allocates the available money between countries differing in terms of both needs and domestic governance the central conclusion is that a donor s utility function that embodies the need governance trade off and the associated optimization mechanism yield a meaningful rule to guide inter country allocation of aid resources

fairness in the international allocation of development aid this paper assesses the allocative performance of foreign aid donors it does so by identifying the consistency of the share of donor aid allocated to each developing country with these their shares of global poverty a given donor s allocative performance is maximised if the share of its aid to each developing country exactly equals its share of global poverty this is equated with fairness in the international allocation of aid the allocative performance of all donors all bilateral donors all multilateral agencies all non dac donor countries the eu france germany japan the united kingdom and the united states for the years 2010 15 is assessed the best performance is exhibited by all bilateral donors while that for an individual donor is exhibited by the united kingdom non dac donors exhibit the worst performance the paper also identifies which developing countries receive the most and least aid relative to their shares of global poverty

perceptions and the politics of finance junk bonds and the regulatory seizure of first capital life in may 1991 one month after seizing executive life california regulators seized first capital life fclic both insurers were drexel clients with large junk bond holdings and both had experienced bank runs fclic s run followed regulators televised comments that its poor condition necessitated a substantial cash infusion yet fclic s statutory capital with junk bonds real estate and mortgages marked to market was far from lowest among major insurers with california policyholders it becomes lowest if junk bonds alone are marked to market at year end 1990 ignoring larger market declines in real estate mortgages and the junk bond market s 21 return in early 1991 our findings suggest a regulatory bias against junk bonds in the political backlash against the 1980s

the allocation of aid among developing countries a comment on mcgillivray s performance index abstract mcgillivray s paper in this journal proposed an index which he claimed ranks donors by the progressiveness with which they allocate their development aid among recipients it is shown here that his index contains a small country bias so that a donor may improve its performance by taking aid from a poor large country and giving it to a small richer one

the allocation of aid among developing countries a multi donor analysis using a per capita aid index abstract this paper seeks to measure the relative aid giving performance of aid donors in terms of the inter recipient distribution of their aid performance is taken to be the extent to which a donor bases its aid allocation on the relative needs of recipient countries donor performance is measured by an income weighted per capita aid index formulated in this paper this index was calculated using the per capita allocations to a sample of 85 recipient countries in the years 1969 84 the performance of 17 dac members plus that of a number of multilateral agencies and that of the dac and these agencies combined is identified results indicate that the performance of four countries belgium finland denmark and norway was generally superior to that of other donors

corporate credit risk dynamics the lack of widely available and comprehensive data of default activity on the corporate level has encouraged the advance of theories of corporate credit risk far beyond related empirical work this article addresses this deficit by examining a unique data set corporate bond defaults and credit ratings compiled by moody s investors service since 1920 the article investigates the time inhomogeneity of company default risk that is the pattern in which the risk of default for a company changes over time the empirical analysis addresses company default risk within a regression framework of competing risks or hazards the analysis identifies and quantifies variations in default risk with macroeconomic conditions with industries and through time an important characterization for many approaches to measuring and managing credit risk

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

wage differentials in brazil theory and evidence the investigation of wage determination and wage differentials in developing countries has concentrated on the effects of human capital and different sources of segmentation associated with institutional arrangements and structural characteristics on earnings in this article we use micro data for brazil for the 1980s and 1990s to test several competitive theories and models with segmentation explained by efficiency wages we find that unmeasured abilities and efficiency wage models seem to play a role in wage determination while compensating differentials and transitory difference theories were found to be irrelevant to wages formation

do performance measures of donors aid allocation underperform indices of donor performance abound their recent popularity has occurred within the context of pessimism over aid s impact and optimism over the effect of changes in donor behaviour rankings of donor allocative performance aim to change donor behaviour either through direct pressure on governments or indirectly through public engagement the indices themselves rely on descriptive measures and typically claim methodological superiority over positive alternatives due to their simplicity however there are two problems first measures do not seem robust to simple variations in methodology second correlation amongst competing indices is low leading to a host of contradictory judgements this offers neither clear technical guidance nor consistent political pressure the advantages and disadvantages of the approach are discussed building upon the more general critique of aggregate indices i suggest a graphical solution that embraces the advantages of the descriptive approach including ease of public communication while avoiding some of its major weaknesses which typically stem from aggregation

the design of bank loan contracts the unique characteristics of bank loans emerge endogenously to enhance efficiency in a model of renegotiation between a borrower and a lender in which there is the potential for moral hazard on each side of the relationship firm risk is endogenous and renegotiated interest rates on the debt need not be monotone in firm risk the initial terms of the debt are not set to price default risk but rather are set to efficiently balance bargaining power in later renegotiation loan pricing may be nonlinear involving initial transfers either from the borrower to the bank or front the bank to the borrower article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

original issue high yield bonds aging analyses of defaults exchanges and calls this paper presents an aging analysis of 741 high yield bonds and finds default exchange and call percentages substantially higher than reported in earlier studies by december 31 1988 cumulative defaults are 34 percent for bonds issued in 1977 and 1978 and range from 19 to 27 percent for issue years 1979 1983 and from 3 to 9 percent for issue years 1984 1986 exchanges are also a significant factor although they often are followed by default moreover a significant percentage of high yield debt 26 47 percent for 1977 1982 has been called by december 31 1988 approximately one third of the bonds issued in 1977 1982 has defaulted or been exchanged and an additional one third had been called on average only 28 percent of these issues are still outstanding there is no evidence that early results for more recent issue years differ markedly from issue years 1977 to 1982

determinants of the decreasing term structure of relative yield spreads for taxable and tax exempt bonds the empirical finding that the relative yield spread for taxable and tax exempt bonds decreases across the term structure is usually attributed to tax differentials and or arbitrage opportunities using monthly data it is found that the decresing term structure of relative yield spreads is determined by the decreasing forward marginal tax rate increasing default risk premium increasing tax timing option premium and expected rate of inflation

aid selectivity according to augmented criteria a dominant trend in the literature maintains that donor assistance should be targeted to poor countries with sound institutions and policies in this context donor selectivity refers to what extent aid is allocated according to the principles of this canonical model this paper shows that it is legitimate for donors to simultaneously use other selectivity criteria corresponding either to expected factors of aid effectiveness or to handicaps to development it is notably argued that vulnerability to exogenous shocks and low level of human capital should be considered as selectivity criteria taking these other criteria into account dramatically changes the assessment of donor selectivity

forecasting losses on a liquidating long term loan portfolio abstract assessing the condition of financial institutions and valuation of loan portfolios in secondary markets require the estimation of exposure to losses on existing portfolios of long term loans data from a major u s financial institution were used to construct a forecasting model with markovian structure and nonstationary transition probabilities the model proved to be effective in representing changes in probability of default that occur as individual loans mature and accurate in forecasting aggregate defaults and losses on a nationwide portfolio of long term loans

terms of trade risk with partial labor mobility abstract we examine the welfare consequences of terms of trade risk in a small open economy in which it is costly for workers to move between sectors relocation costs lead to partial labor mobility sectoral wage gaps and income risk exceeding that of an economy in which relocation is costless using observed wage differentials and standard values for volatility and preferences we find that the welfare cost of partial labor mobility alone is unlikely to be very large even in the absence of self insurance arrangements in addition modest consumption substitution elasticities significantly reduce these welfare costs

the anatomy of the high yield bond market 1987 the anatomy of the high yield bond market financial analysts journal vol 43 no 4 pp 12 25

unemployment and the structure of labor markets in this book 16 leading economists establish the connection between the forces of the labour market and the persistent but ever changing problem of unemployment these scholars examine structural unemployment in terms of efficiency wage and dual labour market models as well as neo classical theory the effects of the decline of the manufacturing sector the rise in services and the upheaval in the oil industry on our understanding of cyclical and frictional unemployment are incorporated into the analysis an examination of the relationship between structural shifts and unemployment considers the frequency and duration of unemployment of displaced workers the effects of migration caused by structural shifts and the phenomenon of unemployment within particular industries finally the book presents intriguing thoughts on the conduct of labour research and experimental policy analysis the contributors include david m lilien alan b krueger lawrence h summers william t dickens lawrence f katz kevin m murphy robert h topel mark dynarski steven m sheffrin danny steinberg frank a monforte james w albrecht john haltiwanger and mark plant

the evolution of buyout pricing and financial structure in the 1980s we examine changes in the pricing and financial structure of large management buyouts in the 1980s over time 1 buyout price to cash flow ratios rose in absolute terms particularly in deals financed using public junk bonds 2 required bank principal repayments accelerated leading to sharply lower ratios of cash flow to total debt obligations 3 private subordinated and bank debt were replaced by public junk debt and 4 management teams and dealmakers took more money out of transactions up front these patterns are consistent with an overheating phenomenon in the buyout market preliminary post buyout evidence lends some support to this interpretation

judging givers equity and scale in aid allocation abstract the paper proposes a ranking index to judge both the quality and quantity of aid given by donor nations the quality of aid is restricted to a single dimension viz how well an aid giver s allocation conforms to the revealed need of aid recipients departing from previous work by mcgillivray and white aid is assumed to be additive to recipient incomes the index satisfies the twin canons of horizontal and vertical equity and provides unbiased comparisons across all allocations it also obviates the need to have separate and very likely conflicting rankings of donors by equity and scale of aid allocation

determinants of canadian bilateral aid allocations humanitarian commercial or political in this paper we examine the determinants of the allocation of canadian bilateral aid over the period 1984 2000 we draw on models of donor behaviour that allow us to incorporate humanitarian commercial and political considerations the trinity of mixed motives that affect canadian aid we find that allocations are moderately altruistic recipient country human rights and membership in the commonwealth and la francophonie also affect aid flows most strikingly our results suggest that canadian aid flows became less altruistic over this period and commercial motives became increasingly important jel classification h50 o10 les determinants des allocations de l aide humanitaire canadienne humanitaires commerciaux ou politiques ce memoire etudie les determinants de l allocation de l aide bilaterale canadienne dans la periode 1984 2000 on utilise des modeles de comportement de donateur qui permettent de prendre en considerations les motivations humanitaires commerciales et politiques la trinite de motifs mixtes qui affectent l aide canadienne on decouvre que les allocations sont moderement altruistes le fait pour un pays de defendre bien les droits de la personne et d etre membre du commonwealth et de la francophonie affecte les flux d aide plus important peut etre les resultats suggerent qu au cours de cette periode les flux d aide canadienne deviennent moins altruistes et les motifs commerciaux de plus en plus importants

the default rate experience on high yield corporate debt recent 1978 83 net returns on high yield low rated debt have been impressive averaging 490 to 580 basis points above the long term government bond index but low rated junk bonds pose a risk of default not present in the higher rated segment of the bond market the authors divided the par value of defaulting debt by total low rated straight debt outstanding to arrive at an estimate of the default rate for high yield bonds excluding johns manville which had the only defaulting debt rated investment grade just prior to the default date for the 1974 84 period this averaged 1 52 per cent or 152 basis points annually year to year variations in the rate were substantial furthermore default experience differed across various industry segments railroads and reits were particularly vulnerable to default in the past although they are unlikely to represent a large portion of future defaults retailer electronic computer airline and oil and gas defaults have become more common in recent years losses from default are actually lower than the default rate alone implies defaulted bonds traded on average at 41 per cent of par shortly after default after accounting for the bonds retained value and the loss of interest the average reduction in return to the investor who had purchased the bonds at par would have been in the range of 96 to 100 basis points annually

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

the resiliency of the high yield bond market the ltv default this paper investigates the resiliency of the new issue high yield bond market by examining the changes in implied default rates of such bonds before and after the largest high yield bond default i e the ltv bankruptcy specifically the paper compares implied default probabilities of high yield bonds during the post ltv period calculated from actual new issue yields with instrumental default probabilities calculated on the assumption that the default had not occurred a comparison of these probabilities reveals that the market s perception of default on the hjgh risk segment of the bond market increased significantly after the ltv bankruptcy however the effect was transitory lasting only six months thus the market was resilient to a major default in recent years high yield debt has become a significant segment of the corporate bond market the main source of the growth has come from new issues of high yield corporate bonds rather than an increase in fallen angels 1 the driving force behind this new breed of high yield debt growth has been its use as a means to tap the capital markets to finance increasingly common leveraged buyouts hostile takeovers and major corporate restructurings the market acceptance of high yield bonds was further enhanced by empirical evidence that net returns on a diversified portfolio of low grade bonds exceeded those on highgrade bonds while the volatility of their monthly returns was no greater 2 the frenzied pace of growth in the high yield debt market however has been accompanied by increasing concerns from various quarters 3 critics have char

a non gaussian panel time series model for estimating and decomposing default risk we model 1981 2005 quarterly default frequencies for a panel of u s firms in different rating and age classes from the standard and poor database the data are decomposed into systematic and firm specific risk components where the systematic component reflects the general economic conditions and the default climate we need to cope with the shared exposure of each age cohort industry and rating class to the same systematic risk factor strongly non gaussian features of the individual time series possible dynamics of an unobserved common risk factor changing default probabilities over the age of the rating and missing observations we propose a non gaussian multivariate state space model that deals with all of these issues simultaneously the model is estimated using importance sampling techniques that have been modified to a multivariate setting we show in a simulation study that such a multivariate approach improves the performance of the importance sampler in our empirical work we find that s

lower grade bonds their risks and returns to reflect as realistically as possible the risks and returns of lower grade bonds the authors constructed an index from actual average returns used in the compilation of the salomon brothers and drexel burnham lambert lower grade indexes supplementing these with month end prices prior to 1982 from the sp thus a diversified portfolio may contain both the debt and equity of the issuing companies

the value of private sector business credit information sharing the us case this paper investigates the value added by private information exchanges that share information on business payment performance we discuss how this information is collected and disseminated by the worlds largest private information broker dun bradstreet we provide the first empirical examination of the importance of this information at the lending decision level our findings indicate that exchange generated information provides significant explanatory power in failure prediction models controlling for other credit information that is easily available to lenders our study complements the work of jappelli and pagano information sharing lending and defaults cross country evidence centre for economic policy research discussion paper 2184 1999 who find in cross country macro level tests that information exchanges add value 2003 elsevier science b v all rights reserved

globalization returns to accumulation and the world distribution of output abstract this paper examines the extent to which the process of globalization can explain the observed widening in the cross country distribution of output per worker on the theoretical front the model highlights why when the labor market is subject to a holdup problem the opening up of trade will cause an increase in the dispersion of income across countries similar to that observed in the data the increase in dispersion in the model arises due to the emergence of a discrepancy between the private and social returns to capital accumulation that favors capital abundant countries on the empirical front we document the relevance of the model by examining whether growth patterns decomposition exercises and specialization patterns support the model s predictions overall we find that over 50 of the recently observed increase in income dispersion across countries can be accounted for by the mechanism exemplified by the model

ranking foreign donors an index combining the scale and equity of aid giving abstract the generosity of aid given and the fairness with which it is distributed among recipients are among the most important criteria for judging and comparing the aid effort of donor countries the present paper builds on a recent theoretical proposal for a complete consistent and combined index combining both these criteria to rank donor countries the index may be used not only to compare donors but also to gauge the progress of individual donors in respect to their aid effort an annual timeseries of donor rankings based on this formula is constructed employing aid data published by the oecd for 1970 1993

time varying return and risk in the corporate bond market this paper examines the pricing of exchange traded long term corporate bond portfolios observable instruments measuring the term structure of interest rates levels of bond and stock prices and a january dummy are found to predict excess returns on corporate bonds an intertemporal asset pricing model with changing expectations and unobservable factors is then estimated for the predictable excess returns using hansen s generalized method of moments the results show that a multibeta linear time varying model of con ditional expected returns with constant betas can successfully value corporate bonds spe cifically the tests indicate the presence of two time varying hedge portfolios the data however support a single latent variable specification when all january observations are excluded this result suggests the existence of a strong january seasonal in one of the latent variables

defaults of original issue high yield convertible bonds recent studies using aging analysis have found high rates of default for rated nonconvertible high yield bonds this paper examines the remainder of the market and concludes that rated and nonrated convertible high yield bonds had significantly lower default rates it also provides some evidence that nonrated nonconvertible securities may have lower default rates even after controlling for issue size and coupon rates in a logit model these differences remain statistically significant the success in marketing original issue high yield bonds has generated significant interest in their default experience studies comparing defaults to the par value of outstanding issues such as altman 1987 altman and nammacher 1985 and weinstein 1987 have found relatively low default rates however these studies understate default rates because of the rapid increase in the par value of outstanding issues and because cumulative default rates increase with years from issuance two recent studies by altman 1989 and asquith mullins and wolff 1989 have corrected these problems by using aging analysis to follow rated nonconvertible high yield bonds over time they find cumulative default rates for such bonds 10 years after issuance exceeding 30 percent this study extends the literature on high yield default rates to convertible and nonrated securities not examined in previous studies the high yield market can be partitioned into rated nonconvertible rated convertible nonrated nonconvertible and nonrated convertible securities other things equal one would expect higher default risk to be associated with higher yields however other things are not equal for example securities may have high yields because of differences in liquidity or differences in conversion options therefore yields reflect more than just expected default risk they also incorporate premiums for other characteristics of individual securities when the securities are partitioned by rating and convertibility the results of this paper show that the cumulative default rates are lower for rated convertible securities than for rated nonconvertible securities because in

biases in the allocation of foreign aid some new evidence abstract the purpose of the paper is to examine the pattern of bilateral and multilateral foreign aid allocations during the 1970s cross section and pooled regressions for a set of roughly 90 countries where aid allocations have been relatively free of gross political overtones confirm the well known bias in per capita aid flows against populous countries butdo not provide evidence of a middle income bias instead regressions on 1976 1978 aid flows and per capita incomes of recipient countries seem to suggest a low income bias i e low income countries received more aid per capita than middle income countries yet there was asample of extremely poor countries which remained neglected in foreign aid allocations