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Author: Arne Christian Klein Publisher: ISBN: 9783957294531 Category : Languages : en Pages :
Book Description
During the global financial crisis, stressed market conditions led to skyrocketing corporate bond spreads that could not be explained by conventional modeling approaches. This paper builds on this observation and sheds light on time-variations in the relationship between systematic risk factors and corporate bond spreads. First, we apply Bayesian model averaging to a battery of candidate variables for determining meaningful systematic risk factors. Second, Markov switching techniques provide us with an endogenous separation of regimes accounting for times of stress, on the one hand, and for normal market conditions, on the other. Our evidence for market indices of euro-denominated bonds suggests that systematic risk factors play a much more prominent role during periods of market turmoil. Most important, expectations about default rates seem to be much more driven by systematic factors rather than idiosyncratic components during times of market stress.
Author: Arne Christian Klein Publisher: ISBN: 9783957294531 Category : Languages : en Pages :
Book Description
During the global financial crisis, stressed market conditions led to skyrocketing corporate bond spreads that could not be explained by conventional modeling approaches. This paper builds on this observation and sheds light on time-variations in the relationship between systematic risk factors and corporate bond spreads. First, we apply Bayesian model averaging to a battery of candidate variables for determining meaningful systematic risk factors. Second, Markov switching techniques provide us with an endogenous separation of regimes accounting for times of stress, on the one hand, and for normal market conditions, on the other. Our evidence for market indices of euro-denominated bonds suggests that systematic risk factors play a much more prominent role during periods of market turmoil. Most important, expectations about default rates seem to be much more driven by systematic factors rather than idiosyncratic components during times of market stress.
Author: Redouane Elkamhi Publisher: ISBN: Category : Languages : en Pages : 50
Book Description
We study the link between corporate bond risk premia and equity returns in a large panel of corporate bond transaction data. In contrast to previous work, we find that a significant part of the time variation in bond risk premia can be explained by equity implied bond risk premium estimates. We also document a large time variation in the expected loss component of bond spreads. This component is related to total asset volatility, whereas the risk premium is related to systematic volatility. In addition, we show by means of linear regressions that augmenting the set of variables predicted by typical structural models with equity-implied bond default risk premia significantly increases explanatory power.
Author: Mr.Jorge A. Chan-Lau Publisher: INTERNATIONAL MONETARY FUND ISBN: 9781451857580 Category : Business & Economics Languages : en Pages : 0
Book Description
This paper finds that the yield spread of investment-grade bonds relative to Treasuries, a proxy of default risk, predicts marginal changes in industrial production in the United States up to 12 months in the future, even upon controlling for a commonly used predictor such as the commercial paper spread. The paper also finds that systematic risk factors associated with the yield spread of investment-grade bonds to a variety of risk-free benchmarks - Treasuries, agency bonds, and AAA-rated bonds - have significant predictive content for future growth rate of industrial production at 3 to 18 months forecasting horizon, both in- and out-of-sample. Finally, a regime-switching estimation shows that the systematic risk component is also able to capture "industrial production business cycle" well.
Author: Viral V. Acharya Publisher: ISBN: Category : Economics Languages : en Pages : 0
Book Description
Abstract: We study the exposure of the U.S. corporate bond returns to liquidity shocks of stocks and treasury bonds over the period 1973 to 2007. A decline in liquidity of stocks or Treasury bonds produces conflicting effects: Prices of investment-grade bonds rise while prices of speculative grade bonds fall substantially. This effect is regime-switching in nature and holds when the state of the economy is in a "stress" regime. The likelihood of being in such a regime can be predicted by macroeconomic and financial market variables that are associated with adverse economic conditions. Our model can predict the out-of-sample bond returns for the stress years 2008-2009. These effects are robust to controlling for other systematic risks (term and default). Our findings suggest the existence of time-varying liquidity risk of corporate bond returns and episodes of flight to liquidity
Author: Mr.Andreas A. Jobst Publisher: International Monetary Fund ISBN: 1475557531 Category : Business & Economics Languages : en Pages : 93
Book Description
The recent global financial crisis has forced a re-examination of risk transmission in the financial sector and how it affects financial stability. Current macroprudential policy and surveillance (MPS) efforts are aimed establishing a regulatory framework that helps mitigate the risk from systemic linkages with a view towards enhancing the resilience of the financial sector. This paper presents a forward-looking framework ("Systemic CCA") to measure systemic solvency risk based on market-implied expected losses of financial institutions with practical applications for the financial sector risk management and the system-wide capital assessment in top-down stress testing. The suggested approach uses advanced contingent claims analysis (CCA) to generate aggregate estimates of the joint default risk of multiple institutions as a conditional tail expectation using multivariate extreme value theory (EVT). In addition, the framework also helps quantify the individual contributions to systemic risk and contingent liabilities of the financial sector during times of stress.
Author: Ann E. Myhr Publisher: Insurance Institute of America ISBN: Category : Business & Economics Languages : en Pages : 670
Book Description
Textbook for students of insurance that examines types of insurers, regulation, marketing, the underwriting process, ratemaking, claims adjusting, reinsurance, financial management, and strategic management.
Author: Charles W. Calomiris Publisher: American Enterprise Institute ISBN: 9780844771007 Category : Business & Economics Languages : en Pages : 60
Book Description
Federal deposit insurance may be "the single most destabilizing influence in the financial system," says economist Charles W. Calomiris in a new study published by AEI. Market discipline provides a better bank safety net than government insurance, he concludes. The Postmodern Bank Safety Net: Lessons from Developed and Developing Economies shows how government deposit insurance subsidizes the risks taken by banks. Weak banks deliberately and sometimes with impunity take on greater risks than they can afford. Undue risk-taking would not be tolerated were private market discipline brought to bear on banks, Calomiris argues. Market discipline would place the regulatory burden on sophisticated market participants with their own money at stake-a bank would survive only if it had investors, and those investors would be willing to risk their money only if they were able to evaluate the bank's risk. Currently, banks that hide loan losses can avoid paying increased deposit insurance costs. At the same time, Calomiris says, government regulators lack strong incentive to determine the true risk characteristics of bank assets-government regulators do not have their own money at stake and they face political pressure to maintain the credit supply. The results can be calamitous. In the 1970s and 1980s the Farm Credit System was increasingly willing to lend against questionable collateral while private banks withdrew from the market as lending risk increased. The system failed, gripping U.S. farmers in a debt crisis. Similarly, the savings and loan failures and the oil-related bank collapses in Texas and Oklahoma of the 19080s can be attributed to the failure of the bank safety net. And Chile, Mexico, and Japan have suffered financial collapses because their governments protected banks from self-inflicted losses.
Author: Jiri Podpiera Publisher: International Monetary Fund ISBN: 1455200573 Category : Business & Economics Languages : en Pages : 34
Book Description
This paper attempts to identify the fundamental variables that drive the credit default swaps during the initial phase of distress in selected European Large Complex Financial Institutions (LCFIs). It uses yearly data over 2004 - 08 for 29 European LCFIs. The results from a dynamic panel data estimator show that LCFIs’ business models, earnings potential, and economic uncertainty (represented by market expectations about the future risks of a particular LCFI and market views on prospects for economic growth) are among the most significant determinants of credit risk. The findings of the paper are broadly consistent with those of the literature on bank failure, where the determinants of the latter include the entire CAMELS structure - that is, Capital Adequacy, Asset Quality, Management Quality, Earnings Potential, Liquidity, and Sensitivity to Market Risk. By establishing a link between the financial and market fundamentals of LCFIs and their CDS spreads, the paper offers a potential tool for fundamentals-based vulnerability and early warning system for LCFIs.
Author: Seungho Jung Publisher: International Monetary Fund ISBN: 1557759677 Category : Business & Economics Languages : en Pages : 36
Book Description
We investigate how corporate stock returns respond to geopolitical risk in the case of South Korea, which has experienced large and unpredictable geopolitical swings that originate from North Korea. To do so, a monthly index of geopolitical risk from North Korea (the GPRNK index) is constructed using automated keyword searches in South Korean media. The GPRNK index, designed to capture both upside and downside risk, corroborates that geopolitical risk sharply increases with the occurrence of nuclear tests, missile launches, or military confrontations, and decreases significantly around the times of summit meetings or multilateral talks. Using firm-level data, we find that heightened geopolitical risk reduces stock returns, and that the reductions in stock returns are greater especially for large firms, firms with a higher share of domestic investors, and for firms with a higher ratio of fixed assets to total assets. These results suggest that international portfolio diversification and investment irreversibility are important channels through which geopolitical risk affects stock returns.
Author: Arne Christian Klein
Author: Arne Christian Klein
Author: Redouane Elkamhi
Author: Mr.Jorge A. Chan-Lau
Author: Viral V. Acharya
Author: Mr.Andreas A. Jobst
Author: Ann E. Myhr
Author: Charles W. Calomiris
Author: Jiri Podpiera
Author: Seungho Jung
Author: