Interconnectedness and systemic risk in the US CDS market

This study assesses systemic risk in the US credit default swap (CDS) market. First, this study estimates the bilateral exposures matrix using aggregate fair value data and theoretically analyze interconnectedness in the US CDS network using various network measures. Second, this study theoretically analyzes the contagious defaults. The default analysis shows the theoretical occurrence of many stand-alone defaults and one contagious default via the CDS network during the global financial crisis. A stress test based on a hypothetical severe stress scenario predicts almost no future contagious defaults. Thus, risk contagion via the CDS network is unlikely.     

Corporate governance and the insolvency risk of financial institutions

We investigate whether shareholder-friendliness of corporate governance mechanisms is related to the insolvency risk of financial institutions. Using a large sample of U.S. financial institutions over the period 2005–2010, we find that corporate governance is positively related to the insolvency risk of financial institutions as proxied by Merton’s distance to default measure and credit default swap (CDS) spread. We also find that “stronger” corporate governance increases insolvency risk relatively more for larger financial institutions and during the period of the financial crisis. Lastly, our results suggest that shareholder-friendliness of corporate governance mechanisms is viewed unfavorably in the bond market.     

Assessment of time-varying systemic risk in credit default swap indices: Simultaneity and contagiousness

This study assesses systemic risk inherent in credit default swap (CDS) indices using empirical and statistical analyses. We define systemic risk in two perspectives: the possibilities of simultaneous and contagious defaults, and then quantify them separately across benchmark models. To do so, we employ a Marshall-Olkin copula model to measure simultaneous default risk, and an interacting intensity-based model to capture contagious default risk. For an empirical test, we collect daily data for the iTraxx Europe CDS index and its tranche prices in the period from 2005 to 2014, and calibrate model parameters varying across time. In addition, we select forecasting models that have minimal prediction errors for the calibrated time series. Finally, we identify significant changes in each dynamic of systemic risk indicator before and after default and downgrade-related episodes that have occurred in the global financial crisis and European sovereign debt crisis.     

Fitting and Forecasting Sovereign Defaults using Multiple Risk Signals

In this article, we try to realize the best compromise between in‐sample goodness of fit and out‐of‐sample predictability of sovereign defaults. To do this, we use a new regression‐tree based approach that signals impending sovereign debt crises whenever pre‐selected indicators exceed specific thresholds. Using data from emerging markets and Greece, Ireland, Portugal and Spain (GIPS) over the period 1975–2010, we show that our model significantly outperforms existing competing approaches (logit, stepwise logit, noise‐to‐signal ratio and regression trees), while balancing in‐ and out‐of‐sample performance. Our results indicate that illiquidity (high short‐term debt to reserves) and default history, together with real GDP growth and US interest rates, are the main determinants of both emerging market country defaults and the recent European sovereign debt crisis.     

A vector-autoregression analysis of credit and liquidity factor dynamics in US LIBOR and Euribor swap markets

We use a vector autoregressive approach to investigate the determinants of US Dollar LIBOR and Euribor swap spread variation during the 2007–2009 crisis in global credit and money markets. Using market-quoted yield and spread data from the highly liquid credit default swap (CDS) and overnight index swap (OIS) markets, we provide compelling empirical evidence that liquidity risk factor shocks have been the dominant drivers of the variation in swap spreads over this period. Our findings provide an explanation for the temporal differences that liquidity shocks have on swap spreads and provide a contemporary perspective on the dynamical interplay between credit-default and liquidity risk-factors in these markets. As all our risk-factor proxies are traded in liquid derivatives markets, our findings have implications for proprietary hedge fund traders hedging an exposure to swap-spread risk, for bank treasurers managing their liquidity requirements and for central bankers seeking to better understand the response of markets to their macroeconomic policy implementation and liquidity management actions. Indeed our markets-based analysis suggests that the European Central Bank (ECB) has underperformed relative to the Federal Reserve in terms of the differing levels of market confidence placed in its macroeconomic policy actions and remedial liquidity interventions during the period.     

Recovering default risk from CDS spreads with a nonlinear filter

We propose a nonlinear filter to estimate the time-varying default risk from the term structure of credit default swap (CDS) spreads. Based on the numerical solution of the Fokker–Planck equation (FPE) using a meshfree interpolation method, the filter performs a joint estimation of the risk-neutral default intensity and CIR model parameters. As the FPE can account for nonlinear functions and non-Gaussian errors, the proposed framework provides outstanding flexibility and accuracy. We test the nonlinear filter on simulated spreads and apply it to daily CDS data of the Dow Jones Industrial Average component companies from 2005 to 2010 with supportive results.     

大股东股权质押、风险承担水平与债券违约风险

基于2015—2019年发生实质性债券违约的上市公司数据,运用二元Probit回归模型,从风险承担水平角度研究大股东股权质押对上市公司债券违约风险的影响。研究发现：大股东股权质押率与债券违约风险显著正相关,风险承担水平在股权质押与债券违约之间发挥了中介作用,高股权质押率的企业通过对其风险承担水平的影响,增加债券违约风险。进一步研究产权性质和信息质量差异对股权质押与债券违约关系的影响,结果显示,在不同产权性质、不同程度信息质量组别中,股权质押比例对债券违约的正向影响均存在差异,且该正向作用在非国有企业、低信息质量组中更为强烈。     

Subprime mortgage default

This paper constructs a reduced-form credit risk model of mortgage default. The data used is of privately-securitized subprime ARMs (adjustable rate mortgages), originated between 1997 and 2008, and observed between 2000 and 2009. The period studied thus encompasses the beginning of the subprime crisis. Given the estimated model, contractual properties of the loans are then used to infer the market price of default risk for the various quarters of origination. It is empirically determined that a change in the inherent nature of borrowers led to a deterioration in their default performance, a change which can be first detected in late 2004. On the other hand, the evidence also indicates that the secondary mortgage market became aware of this change at about this same time. The large rise in defaults in 2007 cannot, therefore, be attributed to any surprise other than the unexpectedly large fall in housing prices.     

Debt stabilization games in the presence of risk premia

As a result of the recent financial crisis and the ensuing economic recession, fiscal deficits have soared in many OECD countries. As a consequence, government debt has been on the rise again after a period of stable or declining government debt. In this paper we analyze debt stabilization in a country that features endogenous risk premia, imposed by financial markets that evaluate the probability of debt default by governments. Endogenous risk premia arise by assuming, e.g., simple linear relations between risk premia and the level of debt. As a result the real interest rate on government debt can be written as a constant (measuring the risk-free real interest rate corrected for real output growth) plus an endogenous risk premium that depends on the debt level. We bring such an endogenous risk premium into Tabellini (1986) model and analyze the impact of it. This gives rise to a non-linear differential game. We solve this game for both a cooperative setting and a non-cooperative setting. The non-cooperative game is solved under an open-loop information structure. We present a bifurcation analysis w.r.t. the risk premium parameter.     

Immunizing Foreign Exchange Contracts Against Swap Rate and Volatility Risks

Swap rate risk, also called the problem of' "maturity gaps," originates from foreign currency holdings whenever the involved contracts have differing maturities. Such differing maturities give rise to a sensitivity of the portfolio values with respect to the "swap rate," or differential between the relative interest rates in two countries. Volatility risk, which typically affects only currency contracts having asymmetric payoffs (such as currency options), gives rise to a sensitivity of portfolio values with respect to changes in the exchange rate volatility. In this article we show how currency portfolios may be immunized , or made insensitive, to both swap rate risk and volatility risk, in the sense of Macaulay's (1938) classical treatment of interest rate risk. The European currency option contract is the primary subject of our discussion, since we show that both ordinary forward contracts and other complicated currency contracts are equivalent to suitable combinations of European currency options.     

Forecasting corporate default risk in China

Default risk prediction can not only provide forward-looking and timely risk measures for regulators and investors, but also improve the stability of the financial system. However, the determinants of corporate default risk in China have not been well-identified. An empirical analysis was conducted using a unique dataset of default events in the Chinese market to fill this gap. First, we demonstrated that the default probability estimated by a structural model, which is widely used in the literature, do not fully reveal the default risk of firms in China. Second, we classified default events into minor and major defaults for empirical analysis. We found that firms that survive minor defaults behave differently from other bankrupt firms. Our results suggest that the determinants of corporate default risk in China and the United States differ. We also found that a firm’s continued increase in cash holdings is one of the most important signs of default. Overall, our study significantly improves the accuracy of forecasting corporate default risk in China.     

Japan’s impactful augmentation of quantitative easing sovereign-bond purchases

This article examines how and to what extent large-scale government bond purchases in the Bank of Japan’s monetary policy affected two components of long-term interest rates over the period 2009–2015. The article divides market yields on popular 5 and 10-year government bonds into future policy-rate expectations with uncertainty and a specific type of term premia required by investors for the bonds’ demand/supply imbalances, by using overnight index swap rates as a proxy for the former. The Bank of Japan augmented the purchases substantially by starting Quantitative and Qualitative Monetary Easing (QQME) in 2013. The QQME became impactful in the sense that it encouraged investors to improve the first component whilst reducing the second component. These appeared mainly as persisting announcement-effects – upward level shifts of the expectations and downward ones of the term premia. The reduction of term premia was much greater for the 10-year maturity than for 5-year one and strengthened after an additional expansion of the QQME in 2014. The QQME is estimated to have enhanced 5-year sovereign bond yields by 11.9 basis points (bps) a month on average whilst reducing 10-year ones by 8.3 bps. The impact on the 5-year yields turned to be negative after the QQME expansion.     

Detecting Financial Collapse and Ballooning Sovereign Risk

This paper proposes a new model for capturing discontinuities in the underlying financial environment that can lead to abrupt falls, but not necessarily sustained monotonic falls, in asset prices. This notion of price dynamics is consistent with existing understanding of market crashes, which allows for a mix of market responses that are not universally negative. The model may be interpreted as a martingale composed with a randomized drift process that is designed to capture various asymmetric drivers of market sentiment. In particular, the model is capable of generating realistic patterns of price meltdowns and bond yield inflations that constitute major market reversals while not necessarily being always monotonic in form. The recursive and moving window methods developed in Phillips, Shi and Yu (2015a,b; PSY), which were designed to detect exuberance in financial and economic data, are shown to have detective capacity for such meltdowns and expansions. This characteristic of the PSY tests has been noted in earlier empirical studies by the present authors and other researchers but no analytic reasoning has yet been given to explain why methods intended to capture the expansionary phase of a bubble may also detect abrupt and broadly sustained collapses. The model and asymptotic theory developed in the present paper together explain this property of the PSY procedures. The methods are applied to analyse S&P 500 stock prices and sovereign risk in European Union countries over 2001–16 using government bond yields and credit default swap (CDS) premia. A pseudo real‐time empirical analysis of these data shows the effectiveness of the monitoring strategy in capturing key events and turning points in market risk assessment.     

基于相依违约的上市公司担保风险度量研究

本文运用基于相依违约的混合模型度量上市公司担保风险,并进行了实证研究。结果表明:此模型能很好的预测上市公司对外担保的违约概率,可对上市公司信用进行评级;在敏感性分析中,违约概率对波动率、无风险利率和相依结构比较敏感,这能为风险管理提供一定的参考。     

Oil price uncertainty and movements in the US government bond risk premia

In this paper, we analyze the predictability of the movements of bond premia of US Treasury due to oil price uncertainty over the monthly period 1953:06 to 2016:12. For our purpose, we use a higher order nonparametric causality-in-quantiles framework, which in turn, allows us to test for predictability over the entire conditional distribution of not only bond returns, but also its volatility, by controlling for misspecification due to uncaptured nonlinearity and structural breaks, which we show to exist in our data. We find that oil uncertainty not only predicts (increases) US bond returns, but also its volatility, with the effect on the latter being stronger. In addition, oil uncertainty tends to have a stronger impact on the shortest and longest maturities (2- and 5-year), and relatively weaker impact on bonds with medium-term (3- and 4-year) maturities. Our results are robust to alternative measures of oil market uncertainty and bond market volatility.     

Dynamic spillover and connectedness between oil futures and European bonds

This paper examines the spillovers and connectedness between crude oil futures and European bond markets (EBMs) having different maturities. We also analyze the hedging effectiveness of crude oil futures-bond portfolios in tranquil and turbulent periods. Using the spillovers index of Diebold and Yilmaz (2012, 2014), we show evidence of time-varying spillovers between markets under investigations, which varies between 65% and 83%. Moreover, three-month, six-month, one-year, three-year and thirty-year bonds and crude oil futures are net receivers of risk from other markets, whereas the remaining bonds are net contributors of risk to the other markets. Crude oil futures receive more risk from long-term than short-term bonds. Moreover, the magnitude of risk transmission is low for the pre-crisis and economic recovery periods. Crude oil futures market contributes significantly to the risk of other markets during the oil crisis and Brexit period. A portfolio risk analysis shows that that most investments should be in oil rather than bonds (except the short-term bonds). The hedge ratio is sensitive to market conditions, where the cost of hedging increases during GFC and ESDC period. Finally, a crude oil futures-bond portfolio offers the best hedging effectiveness during the COVID-19 pandemic period.     

Global Credit Risk: World,Country and Industry Factors

We investigate the dynamic properties of systematic default risk conditions for firms in different countries, industries and rating groups. We use a high‐dimensional nonlinear non‐Gaussian state‐space model to estimate common components in corporate defaults in a 41 country samples between 1980:Q1 and s2014:Q4, covering both the global financial crisis and euro area sovereign debt crisis. We find that macro and default‐specific world factors are a primary source of default clustering across countries. Defaults cluster more than what shared exposures to macro factors imply, indicating that other factors also play a significant role. For all firms, deviations of systematic default risk from macro fundamentals are correlated with net tightening bank lending standards, suggesting that bank credit supply and systematic default risk are inversely related. Copyright © 2016 John Wiley & Sons, Ltd.     

Environmental,social and governance disclosure and default risk

We investigate whether environmental, social and governance (ESG) disclosure is related to default risk. Using a sample of US nonfinancial institutions from 2006 to 2017, we find that ESG disclosure is positively related to Merton's distance to default and is negatively related to the credit default swap spread, which suggests that firms with a higher ESG disclosure have lower default risk. Our analysis further indicates that the inverse effect of ESG disclosure on default risk is through increased profitability and reduced performance variability and cost of debt. We also document that the negative impact of ESG disclosure on default risk is existent only for mature and older firms. These results are important for all stakeholders of firms, including shareholders and bondholders to consider firm's ESG disclosure in conjunction with life cycle stage before making their investment decisions.     

Pricing Range Accrual Interest Rate Swap employing LIBOR market models with jump risks

This research derives the LIBOR market model with jump risks, assuming that interest rates follow a continuous time path and tend to jump in response to sudden economic shocks. We then use the LIBOR model with jump risk to price a Range Accrual Interest Rate Swap (RAIRS). Given that the multiple jump processes are independent, we employ numerical analysis to further demonstrate the influence of jump size, jump volatility, and jump frequency on the pricing of RAIRS. Our results show a negative relation between jump size, jump frequency, and the swap rate of RAIRS, but a positive relation between jump volatility and the swap rate of RAIRS.     

Default estimation,correlated defaults,and expert information

Capital allocation decisions are made on the basis of an assessment of creditworthiness. Default is a rare event for most segments of a bank's portfolio and data information can be minimal. Inference about default rates is essential for efficient capital allocation, for risk management and for compliance with the requirements of the Basel II rules on capital standards for banks. Expert information is crucial in inference about defaults. A Bayesian approach is proposed and illustrated using prior distributions assessed from industry experts. A maximum entropy approach is used to represent expert information. The binomial model, most common in applications, is extended to allow correlated defaults yet remain consistent with Basel II. The application shows that probabilistic information can be elicited from experts and econometric methods can be useful even when data information is sparse. Copyright © 2009 John Wiley & Sons, Ltd.