Reinforced urn processes for credit risk models

We propose a Bayesian nonparametric model to estimate rating migration matrices and default probabilities using the reinforced urn processes (RUP) introduced in Muliere et al. (2000). The estimated default probability becomes our prior information in a parametric model for the prediction of the number of bankruptcies, with the only assumption of exchangeability within rating classes. The Polya urn construction of the transition matrix justifies a Beta distributed de Finetti measure. Dependence among the processes is introduced through the dependence among the default probabilities, with the Bivariate Beta Distribution proposed in Olkin and Liu (2003) and its multivariate generalization.     

Regulating the banking sector to support credit access: Evidence from small business

This study investigated the effectiveness of regulatory interventions in mitigating the harmful effects of financial crises on small firms. We examine the impact of a support factor implemented by European policymakers on Italian micro-, small-, and medium-sized enterprises (MSMEs) between 2007 and 2017. The analysis uses a difference-in-differences approach to assess the credit conditions of these firms. Contrary to expectations, our results show that MSMEs in Italy continue to face credit constraints even after the introduction of the support factor. In contrast, we find that structural factors and portfolio effects play a more important role in promoting favorable credit conditions for small firms. Our results highlight the importance of considering these factors in conjunction with regulatory interventions to achieve better outcomes. This study has implications for policymakers and stakeholders, particularly in assessing the appropriateness of extending support factors for different policy purposes.     

Rational panics and stock market crashes

This paper offers an explanation for stock market crashes which focuses on the role of rational but uninformed traders. We show that uninformed traders can precipitate a price crash because as prices decline, they surmise that informed traders received negative information, which leads them to reduce their demand for assets and drive the price of stocks even lower. The model yields several implications, such as that crashes can occur even when the fundamentals are strong, and that the magnitude of the crash depends on the fraction of uninformed investors and the amount of unsophisticated passive investing present in the market.     

Global Imbalances: The Role of Emerging Asia

This paper investigates the role played by emerging Asia in the emergence and evolution of the global trade imbalances. Based on simulations in a general-equilibrium model of the world economy, we find that a productivity slowdown in the nontradable sector of these economies in the second half of the 1990s fits regional macroeconomic developments relatively well, but has limited spillover effect to the United States trade balance. In contrast, an increase in the desired level of emerging Asia net foreign assets starting in 2001 not only fits regional developments relatively well, but also has a significant spillover effect to the United States.     

Social Security and Old Age Unemployment Risk with Efficient Wage Bargaining

I analyze a life‐cycle economy with old age productivity risk where wages, employment, and severance payments are set through efficient bargaining between risk averse unions and risk neutral firms. Allocations with limited union membership are second‐best inefficient as they generate too little labor supply in young age, too much consumption before retirement, too little employment of older workers (early retirement), and too little insurance against old age unemployment. Providing public transfers to early retirees (disability benefits or early pensions) might help to increase the degree of risk sharing at the cost of lower old age employment. Depending on whether absolute risk aversion is increasing or decreasing in consumption, these policies might or might not produce efficiency gains at equilibrium.     

Credit quantity and credit quality: Bank competition and capital accumulation

In this paper we show that bank competition has an intrinsically ambiguous impact on capital accumulation. We further show that it is also responsible for the emergence of development traps in economies that otherwise would be characterized by unique equilibria. These results explain the conflicting evidence emerging from the recent empirical studies of the effects of bank competition on economic growth. We obtain them developing a dynamic, general equilibrium model of capital accumulation where banks operate in a Cournot oligopoly. More banks lead to a higher quantity of credit available to entrepreneurs, but also to diminished incentives to offer relationship services that improve the likelihood of success of investment projects. We also show that conditioning on one key parameter resolves the theoretical ambiguity: in economies where intrinsic market uncertainty is high (low), less (more) competition leads to higher capital accumulation.     

Assessment of meaningful change in routine outcome measurement (ROM) with a combination of a longitudinal and a ‘classify and count’ approach

To assess significant changes of health status in people receiving health care, distribution-based and anchor-based methods have been proposed. However, there is no real consensus on what method is the best for evaluating clinically meaningful change. To maximize the internal and external validity of outcome assessment, we propose combining two approaches as recommended by recent practical guidelines on this field. Specifically, we suggest applying longitudinal hierarchical linear models on subgroups of patients showing reliable change and reliable and clinically significant change. This combined approach improved the model’s ability (1) to quantify the magnitude of changes to be reliable and clinically meaningful and (2) to select significant predictors of changes. An empirical application on a prevalence sample of Italian outpatients attending four community mental health services was done. A cross-sectional model and three longitudinal models were applied on the entire study sample and reliable and clinically meaningful change subsamples to investigate the magnitude of change and the predictive effect on outcomes of clinical, socio-demographic and process variables on different patients’ subgroups. Differences were found suggesting that both the statistical method and the sample used to calculate individual changes affect the estimates. The main conclusion is that ignoring the longitudinal data structure or including patients with unreliable change at the follow-up might result in misleading inferences that can alter the real magnitude of changes and the contributions of predictors. The approach proposed provides robust feedback to clinicians on clinically significant change and can be recommended in outcome studies and research.     

The Effects of Auditor Social and Human Capital on Auditor Compensation: Evidence from the Italian Small Audit Firm Market

Abstract

This study examines whether social and human capital influence the compensation of individual auditors in the small audit firm market. We employ a sample of Italian auditors and use measures from the network and auditing literatures to capture their professional connections, representing social capital, and their industry expertise, representing human capital. Our findings show a positive and economically meaningful association between these individual attributes and auditor compensation. We run several tests to address potential endogeneity issues in our research design. Our results suggest that, in the small audit market, clients perceive as valuable those auditors with higher social and human capital, and as a result, are willing to pay a premium for these specific auditor attributes.