Modeling issuer default risk in basket default swaps: the impact of default correlation

2012 ◽  
Vol 6 (3) ◽  
pp. 67-82
Author(s):  
Po-Cheng Wu
Keyword(s):  
Default Risk ◽  
Default Correlation ◽  
The Impact

PRICING COUNTERPARTY RISK INCLUDING COLLATERALIZATION, NETTING RULES, RE-HYPOTHECATION AND WRONG-WAY RISK

2013 ◽  
Vol 16 (02) ◽  
pp. 1350007 ◽  
Author(s):  
DAMIANO BRIGO ◽  
AGOSTINO CAPPONI ◽  
ANDREA PALLAVICINI ◽  
VASILEIOS PAPATHEODOROU
Keyword(s):  
Interest Rate ◽  
Credit Derivatives ◽  
Credit Default Swaps ◽  
Credit Spread ◽  
Counterparty Risk ◽  
Default Correlation ◽  
Dynamical Models ◽  
Credit Default ◽  
The Impact

This article is concerned with the arbitrage-free valuation of bilateral counterparty risk through stochastic dynamical models when collateral is included, with possible rehypothecation. The payout of claims is modified to account for collateral margining in agreement with International Swap and Derivatives Association (ISDA) documentation. The analysis is specialized to interest-rate and credit derivatives. In particular, credit default swaps are considered to show that a perfect collateralization cannot be achieved under default correlation. Interest rate and credit spread volatilities are fully accounted for, as is the impact of re-hypothecation, collateral margining frequency, and dependencies.

scholarly journals Does Banking Management Affect Credit Risk? Evidence from the Indian Banking System

2018 ◽  
Vol 6 (3) ◽  
pp. 67 ◽  
Author(s):  
Laxmi Koju ◽  
Ram Koju ◽  
Shouyang Wang
Keyword(s):  
Credit Risk ◽  
Default Risk ◽  
Banking System ◽  
Capital Requirements ◽  
Operating Efficiency ◽  
Investment Strategies ◽  
Empirical Results ◽  
Bank Managers ◽  
Credit Standards ◽  
The Impact

This study investigated the impact of banking management on credit risk using a sample of Indian commercial banks. The study employed dynamic panel estimations to evaluate the link between banking management variables and credit risk. The empirical results show that an increase in loan portion over total assets does not necessarily increase problem loans. The findings suggest that high capital requirements and large bank size do not reduce default risk, whereas high profitability and strong income diversification policies lower the likelihood of default risk. The overall empirical results supported the “operating efficiency”, “diversification” and “too big to fail” hypotheses, confirming that credit quality in the banking industry is mainly driven by profitability, banking supervision, high credit standards and strong investment strategies. The findings are relevant to bank managers, investors and bank regulators, in formulating effective credit policies and investment strategies.

scholarly journals The Impact of Banking Competition on Firm Credit Risk and Leverage

SAGE Open ◽  
2021 ◽  
Vol 11 (4) ◽  
pp. 215824402110615
Author(s):  
Chengxiao Feng ◽  
Zhubo Li ◽  
Zhen Peng
Keyword(s):  
Default Risk ◽  
Credit Constraints ◽  
Contingent Claims ◽  
Claims Analysis ◽  
Banking Competition ◽  
Leverage Ratio ◽  
Contingent Claims Analysis ◽  
Credit Risks ◽  
Default Risks ◽  
The Impact

A firm’s default risk is closely related to its macrofinancial stability. As financial reform deepens, banking competition may ease firms’ credit constraints, encouraging them to increase their leverage and default risks. This study uses contingent claims analysis to examine firms’ asset–liability ratio and default distance. We find that companies have low leverage and low overall default risks. Moreover, a pro-cyclical effect exists between leverage and economic growth. As banking competition becomes more intense, the default risk decreases, but firms’ leverage ratio rises significantly. The impact is more prominent for highly leveraged firms. Our findings also indicate that utilizing the contingent claims analysis method to measure firms’ leverage and default risks provides more accurate results. Moreover, we provide empirical evidence of the impact of banking competition on firms’ leverage and credit risks. The results suggest that enhancing financial competition has a positive effect on easing credit constraints and reducing default risks.

No-Fly Zone in the Loan Office: How Chief Executive Officers’ Risky Hobbies Affect Credit Stakeholders’ Evaluation of Firms

2021 ◽  
Author(s):  
Bo Ouyang ◽  
Yi Tang ◽  
Chong Wang ◽  
Jian Zhou
Keyword(s):  
Chief Executive Officers ◽  
Default Risk ◽  
Chief Executive ◽  
Bank Loans ◽  
Bank Loan ◽  
Cost Of Debt ◽  
Data Set ◽  
Work Related ◽  
Executive Officers ◽  
The Impact

The extant research has often examined the work-related experiences of corporate executives, but their off-the-job activities could be just as insightful. This study employs a novel proxy for the risky hobbies of chief executive officers (CEOs)—CEOs’ hobby of piloting a private aircraft—and investigates its effect on credit stakeholders’ evaluation of the firms led by the CEOs as reflected in bank loan contracting. Using a longitudinal data set on CEOs of large United States-listed firms across multiple industries between 1993 and 2010, we obtain strong evidence that bank loans to firms steered by CEOs who fly private jets as a hobby tend to incur a higher cost of debt, to be secured, to have more covenants, and to be syndicated. These effects are mainly driven by banks, which perceive such firms as having a higher default risk. These relationships become stronger when the CEO is more important to the firm and/or can exercise stronger control over decision making. Supplemented by field interviews, our results are also robust to various endogeneity checks using different experimental designs, the Heckman two-stage model, a propensity score-matching approach, a difference-in-differences test, and the impact threshold of confounding variables.

THE IMPACT OF LEARNING ON BUSINESS CYCLE FLUCTUATIONS IN THE CONSUMER UNSECURED CREDIT MARKET

2018 ◽  
Vol 24 (5) ◽  
pp. 1087-1123 ◽  
Author(s):  
Matthew N. Luzzetti ◽  
Seth Neumuller
Keyword(s):  
Business Cycle ◽  
Interest Rates ◽  
Default Risk ◽  
Credit Market ◽  
Credit Spread ◽  
Cross Sectional ◽  
Business Cycle Fluctuations ◽  
Unsecured Debt ◽  
Consumer Default ◽  
The Impact

We document that the credit spread on consumer unsecured debt exhibits a persistent, hump-shaped response to an increase in the charge-off rate. This stylized fact poses a significant challenge for a standard model of consumer default in which lenders have rational expectations and, therefore, the credit spread continuously adjusts to reflect the true default incentives of each borrower. In an effort to explain this feature of the data, we construct a model of consumer default with countercyclical income risk in which lenders learn about default risk over time by observing the history of repayment decisions, as is the case in practice. In addition to matching credit spread dynamics, allowing lenders to learn about default risk substantially improves the model’s ability to generate realistic business cycle fluctuations in the consumer unsecured credit market and match the cross-sectional distribution of unsecured debt and dispersion of interest rates observed in the data.

scholarly journals The impact of European bank mergers on bidder default risk

2011 ◽  
Vol 35 (4) ◽  
pp. 902-915 ◽  
Author(s):  
Francesco Vallascas ◽  
Jens Hagendorff
Keyword(s):  
Default Risk ◽  
Bank Mergers ◽  
European Bank ◽  
The Impact

The impact of minority foreign ownership and controlling shareholder on bank risk and performance

2015 ◽  
Vol 41 (5) ◽  
pp. 526-546 ◽  
Author(s):  
Ruth Tacneng
Keyword(s):  
Default Risk ◽  
Voting Rights ◽  
Foreign Ownership ◽  
Controlling Shareholder ◽  
Content Type ◽  
Bank Behavior ◽  
Family Business Groups ◽  
And Performance ◽  
Domestic Banks ◽  
The Impact

Purpose – The purpose of this paper is to examine the impact of minority foreign ownership on the risk taking behavior and performance of domestic banks in a country where foreign ownership restrictions are imposed. Design/methodology/approach – Mainly controlled by family business groups, the authors examine the extent by which the presence and the level of foreign ownership and voting rights affect domestic bank behavior. Findings – The results show that compared with those purely domestic-owned, banks with foreign shareholdings have lower levels of insider lending and have higher loan portfolio quality. Moreover, the authors find an increase in foreign voting rights effective in raising risk-adjusted returns and in lowering default risk. This positive effect on performance, however, ceases at higher levels of control manifested by the majority domestic shareholder. Research limitations/implications – Overall, this study shows that there are significant benefits derived from minority foreign shareholder presence in Philippine domestic banks. Originality/value – This paper contributes to the debate of whether it may be beneficial to reduce or completely lift the foreign ownership restrictions imposed on the banks in the country.

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