A. Saunders, Alessandro Spina, Sascha Steffen, D. Streitz
We use secondary corporate loan-market prices to construct a novel loan-market-based credit spread. This measure has considerable predictive power for economic activity across macroeconomic outcomes in both the U.S. and Europe and captures unique information not contained in public market credit spreads. Loan-market borrowers are compositionally different and particularly sensitive to supply-side frictions as well as financial frictions that emanate from their own balance sheets. This evidence highlights the joint role of financial intermediary and borrower balance-sheet frictions in understanding macroeconomic developments and enriches our understanding of which type of financial frictions matter for the economy
{"title":"Corporate Loan Spreads and Economic Activity","authors":"A. Saunders, Alessandro Spina, Sascha Steffen, D. Streitz","doi":"10.2139/ssrn.3717358","DOIUrl":"https://doi.org/10.2139/ssrn.3717358","url":null,"abstract":"We use secondary corporate loan-market prices to construct a novel loan-market-based credit spread. This measure has considerable predictive power for economic activity across macroeconomic outcomes in both the U.S. and Europe and captures unique information not contained in public market credit spreads. Loan-market borrowers are compositionally different and particularly sensitive to supply-side frictions as well as financial frictions that emanate from their own balance sheets. This evidence highlights the joint role of financial intermediary and borrower balance-sheet frictions in understanding macroeconomic developments and enriches our understanding of which type of financial frictions matter for the economy","PeriodicalId":11410,"journal":{"name":"Econometric Modeling: Capital Markets - Risk eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-10-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"81417856","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Shawbrook Bank Ltd is a commercial bank serving wide range of savings and lending products to their customers especially small and medium enterprises. Therefore, credit risk associated with the loans is high. The purpose of this study is to study the effect of internal factors, external factors and both internal and external factors on the credit risk of Shawbrook. The study is done by investigating the annual reports from 2015 to 2019. This study used multiple linear regression model to analyze the data. The findings show that GDP growth is the most significant variable to the credit risk of the bank. The bank should have prepared well even when the economic is good. Since economic recession is unavoidable, Shawbrook must maintain minimum capital to absorb the loss during economic recession.
{"title":"The Effect of Internal and External Factors on Credit Risk : A Study on Shawbrook Bank Limited in United Kingdom","authors":"Hui Qie Pang","doi":"10.2139/ssrn.3933670","DOIUrl":"https://doi.org/10.2139/ssrn.3933670","url":null,"abstract":"Shawbrook Bank Ltd is a commercial bank serving wide range of savings and lending products to their customers especially small and medium enterprises. Therefore, credit risk associated with the loans is high. The purpose of this study is to study the effect of internal factors, external factors and both internal and external factors on the credit risk of Shawbrook. The study is done by investigating the annual reports from 2015 to 2019. This study used multiple linear regression model to analyze the data. The findings show that GDP growth is the most significant variable to the credit risk of the bank. The bank should have prepared well even when the economic is good. Since economic recession is unavoidable, Shawbrook must maintain minimum capital to absorb the loss during economic recession.","PeriodicalId":11410,"journal":{"name":"Econometric Modeling: Capital Markets - Risk eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-09-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"74550114","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study the difference between the level of systemic risk that is empirically measured on an interbank network and the risk that can be deduced from the balance sheets composition of the participating banks. Using generalised DebtRank dynamics, we measure observed systemic risk on e-MID network data (augmented by BankFocus information) and compare it with the expected systemic of a null model network -- obtained through an appropriate maximum-entropy approach constraining relevant balance sheet variables. We show that the aggregate levels of observed and expected systemic risks are usually compatible but differ significantly during turbulent times -- in our case, after the default of Lehman Brothers (2009) and the VLTRO implementation by the ECB (2012). At the individual level instead, banks are typically more or less risky than what their balance sheet prescribes due to their position in the network. Our results confirm on one hand that balance sheet information used within a proper maximum-entropy network model provides good systemic risk estimates, and on the other hand the importance of knowing the empirical details of the network for conducting precise stress tests of individual banks -- especially after systemic events.
{"title":"Systemic Risk in Interbank Networks: Disentangling Balance Sheets and Network Effects","authors":"Alessandro Ferracci, G. Cimini","doi":"10.2139/ssrn.3933626","DOIUrl":"https://doi.org/10.2139/ssrn.3933626","url":null,"abstract":"We study the difference between the level of systemic risk that is empirically measured on an interbank network and the risk that can be deduced from the balance sheets composition of the participating banks. Using generalised DebtRank dynamics, we measure observed systemic risk on e-MID network data (augmented by BankFocus information) and compare it with the expected systemic of a null model network -- obtained through an appropriate maximum-entropy approach constraining relevant balance sheet variables. We show that the aggregate levels of observed and expected systemic risks are usually compatible but differ significantly during turbulent times -- in our case, after the default of Lehman Brothers (2009) and the VLTRO implementation by the ECB (2012). At the individual level instead, banks are typically more or less risky than what their balance sheet prescribes due to their position in the network. Our results confirm on one hand that balance sheet information used within a proper maximum-entropy network model provides good systemic risk estimates, and on the other hand the importance of knowing the empirical details of the network for conducting precise stress tests of individual banks -- especially after systemic events.","PeriodicalId":11410,"journal":{"name":"Econometric Modeling: Capital Markets - Risk eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-09-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87944942","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Ramsay Health Care Limited (RHC) is an Australian public listed company that provides various quality health care through a worldwide network of clinical practices, research, and teaching. It is the largest company in the industry of private general hospitals in Australia, with more than 8.5 million patient visits/admissions per year, around 77,000 employees, 519 facilities and hospitals in 11 countries of 4 regions which are Australia, Europe, the UK, and Asia (Ramsay Health Care 2020). RHC has achieved organic growth, developed abandoned industrial facilities and expanded its capacity and acquisitions both internationally and domestically (IBISWorld 2021). This report evaluates the creditworthiness of Ramsay Health Care and allocates a credit outcome for this company. Firstly, in financial analysis, ratios have been calculated to determine the financial performance of the company. Then, in the non-financial analysis part, non-financial information that influences the creditworthiness of the company is analysed. After that, in the market/industry section, the company’s market position will be compared to the industry conditions to determine the impacts on the current and potential performance of the company. Finally, in the conclusion part, a credit determination is made based on this report’s findings.
Ramsay Health Care Limited (RHC)是一家澳大利亚上市公司，通过全球临床实践、研究和教学网络提供各种优质医疗服务。它是澳大利亚私立综合医院行业中最大的公司，每年有超过850万患者就诊/入院，约77,000名员工，在澳大利亚，欧洲，英国和亚洲4个地区的11个国家拥有519家设施和医院(Ramsay Health Care 2020)。RHC实现了有机增长，开发了废弃的工业设施，并在国际和国内扩大了产能和收购(IBISWorld 2021)。本报告评估了拉姆齐医疗保健公司的信誉，并为该公司分配了一个信用结果。首先，在财务分析中，计算比率来确定公司的财务绩效。然后，在非财务分析部分，分析了影响公司信誉度的非财务信息。之后，在市场/行业部分，将公司的市场地位与行业状况进行比较，以确定对公司当前和潜在业绩的影响。最后，在结论部分，根据本报告的研究结果进行信用认定。
{"title":"Credit & Lending Decisions Assessment Report on Ramsay Health Care","authors":"Vasilios Triantafilakis","doi":"10.2139/ssrn.3921874","DOIUrl":"https://doi.org/10.2139/ssrn.3921874","url":null,"abstract":"Ramsay Health Care Limited (RHC) is an Australian public listed company that provides various quality health care through a worldwide network of clinical practices, research, and teaching. It is the largest company in the industry of private general hospitals in Australia, with more than 8.5 million patient visits/admissions per year, around 77,000 employees, 519 facilities and hospitals in 11 countries of 4 regions which are Australia, Europe, the UK, and Asia (Ramsay Health Care 2020). RHC has achieved organic growth, developed abandoned industrial facilities and expanded its capacity and acquisitions both internationally and domestically (IBISWorld 2021). This report evaluates the creditworthiness of Ramsay Health Care and allocates a credit outcome for this company. Firstly, in financial analysis, ratios have been calculated to determine the financial performance of the company. Then, in the non-financial analysis part, non-financial information that influences the creditworthiness of the company is analysed. After that, in the market/industry section, the company’s market position will be compared to the industry conditions to determine the impacts on the current and potential performance of the company. Finally, in the conclusion part, a credit determination is made based on this report’s findings.","PeriodicalId":11410,"journal":{"name":"Econometric Modeling: Capital Markets - Risk eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85833451","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Financial innovation provides an accommodating avenue for parties to develop strategic means to prevent or avoid risk by spreading it across the financial system through efficient transferral to other parties. This transferral is done in numerous ways, the most notorious of which is through Credit Risk Transfer (CRT) Instruments. Consequently, the ideology of moving risk or seeing risk as being valuable and the ease of doing such transferral feeds the risk appetite of investors and makes them underestimate the implication of the credit risk they take, making investors fail to take the required protective measures to prevent excessive risk acquisition. The Credit Risk Transfer Markets allow the efficient flow of capital allocation and highly liquid Credit Risk Transfer instruments. By enabling this, markets consequently permit opportunism in risk management by propelling the ‘originate-to-distribute’ model of the Loan and Credit markets. The opportunism process goes thus: human error and moral hazard are encouraged by under collateralisation and risk dispersal mechanisms that tangle-up various Credit Risk that is easy to market in a period of increased risk appetite. Needless to say, the process is not always so straight-jacketed. Liberal regulatory and supervisory responses strengthen the opportunism by allowing the polarisation of Information accumulation. The information being the basis on which investor decisions are made require comprehensive and ‘faithful’ disclosure which, unfortunately, usually is not the case in Credit Risk Transfer. An accepted but irrational belief in the notion that excessive information about the constituent credit risk formulating a substantial portion in a pool of credit instruments or a genre of derivative financial products deters liquidity and investor interest; is a creed in the primary financial institutions. Regulatory intervention is further hindered by the belief in the market mechanisms ability to ‘correct anomalies’ more efficiently than a direct and precise regulatory intervention would. The aim of this work is to attempt pointing out the flaws in the liberal regulatory attitude to Credit Risk Transfer activities and advocate a more welfare-suitable approach to Credit Risk Transfer regime by focusing on information availability and collection, and by examining regulatory systems that have been time-tested on their welfare suitability and information efficiency. Though theoretical in nature, this work seeks to serve as a medium for inter-doctrinal analysis of financial products by developing on the legal theory of finance
{"title":"Identifying the Information Polarities in Credit Risk Transfer Instruments; A Case for Regulatory Product Intervention and Product Liability Framework","authors":"Odunayo Olowookere","doi":"10.2139/ssrn.3910048","DOIUrl":"https://doi.org/10.2139/ssrn.3910048","url":null,"abstract":"Financial innovation provides an accommodating avenue for parties to develop strategic means to prevent or avoid risk by spreading it across the financial system through efficient transferral to other parties. This transferral is done in numerous ways, the most notorious of which is through Credit Risk Transfer (CRT) Instruments. Consequently, the ideology of moving risk or seeing risk as being valuable and the ease of doing such transferral feeds the risk appetite of investors and makes them underestimate the implication of the credit risk they take, making investors fail to take the required protective measures to prevent excessive risk acquisition. The Credit Risk Transfer Markets allow the efficient flow of capital allocation and highly liquid Credit Risk Transfer instruments. By enabling this, markets consequently permit opportunism in risk management by propelling the ‘originate-to-distribute’ model of the Loan and Credit markets. The opportunism process goes thus: human error and moral hazard are encouraged by under collateralisation and risk dispersal mechanisms that tangle-up various Credit Risk that is easy to market in a period of increased risk appetite. Needless to say, the process is not always so straight-jacketed. Liberal regulatory and supervisory responses strengthen the opportunism by allowing the polarisation of Information accumulation. The information being the basis on which investor decisions are made require comprehensive and ‘faithful’ disclosure which, unfortunately, usually is not the case in Credit Risk Transfer. An accepted but irrational belief in the notion that excessive information about the constituent credit risk formulating a substantial portion in a pool of credit instruments or a genre of derivative financial products deters liquidity and investor interest; is a creed in the primary financial institutions. Regulatory intervention is further hindered by the belief in the market mechanisms ability to ‘correct anomalies’ more efficiently than a direct and precise regulatory intervention would. The aim of this work is to attempt pointing out the flaws in the liberal regulatory attitude to Credit Risk Transfer activities and advocate a more welfare-suitable approach to Credit Risk Transfer regime by focusing on information availability and collection, and by examining regulatory systems that have been time-tested on their welfare suitability and information efficiency. Though theoretical in nature, this work seeks to serve as a medium for inter-doctrinal analysis of financial products by developing on the legal theory of finance","PeriodicalId":11410,"journal":{"name":"Econometric Modeling: Capital Markets - Risk eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-08-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82219882","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Carlo Bellavite Pellegrini, Peter Cincinelli, M. Meoli, G. Urga
In the aftermath of the 2008 financial crisis, the development of shadow banking has been seen as one of the determinants for the increase of system risk. While diversity within the shadow banking system has been largely overlooked, in this paper we focus on European Monetary Market Funds (MMFs) and Finance Services (FSs) in order to investigate their influence on systemic risk. We evaluate the impact of their accounting and financial variables on systemic risk using the Adrian and Brunnermeier (2016)'s ∆CoVaR measure. The dataset is composed of 476 listed traditional and shadow European banking entities, over the period 2006:12015:4. We find that the size of financial institutions contributes more to systemic risk, in particular for MMFs. Market-to-book value ratio, beta and equity returns volatility play a crucial role in explaining systemic risk for FSs. Finally, for traditional banks, the short-term liability ratio is a key determinant in increasing systemic risk.
{"title":"The Role of Shadow Banking and the Systemic Risk in the European Financial System","authors":"Carlo Bellavite Pellegrini, Peter Cincinelli, M. Meoli, G. Urga","doi":"10.2139/ssrn.3909992","DOIUrl":"https://doi.org/10.2139/ssrn.3909992","url":null,"abstract":"In the aftermath of the 2008 financial crisis, the development of shadow banking has been seen as one of the determinants for the increase of system risk. While diversity within the shadow banking system has been largely overlooked, in this paper we focus on European Monetary Market Funds (MMFs) and Finance Services (FSs) in order to investigate their influence on systemic risk. We evaluate the impact of their accounting and financial variables on systemic risk using the Adrian and Brunnermeier (2016)'s ∆CoVaR measure. The dataset is composed of 476 listed traditional and shadow European banking entities, over the period 2006:12015:4. We find that the size of financial institutions contributes more to systemic risk, in particular for MMFs. Market-to-book value ratio, beta and equity returns volatility play a crucial role in explaining systemic risk for FSs. Finally, for traditional banks, the short-term liability ratio is a key determinant in increasing systemic risk.","PeriodicalId":11410,"journal":{"name":"Econometric Modeling: Capital Markets - Risk eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-08-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88100007","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
While many have discussed the social issues that might arise because of a majority-conservative Supreme Court, one critical consequence of the current Supreme Court has been overlooked: the role of the Supreme Court in generating or avoiding systemic risk. For some time, systemic financial risk has been regulated by a mix of self-regulatory organizations (SROs), such as the Depository Trust Corporation, and federal regulators such as the Financial Stability Oversight Council. However, the Supreme Court’s recent jurisprudence now creates real risk that federal courts will declare keystone SROs unconstitutional because they do not fit neatly into an eighteenth-century constitutional framework. SROs are under-appreciated regulatory entities comprised of industry members regulating their own industries with deferential oversight from federal administrative agencies. While ordinary civics discussions entirely omit SROs, they play a critical legal and economic roles and exercise enormous power delegated to them by the federal government. Yet as nominally private entities, they enforce federal law and their own rules without abiding by the restrictions imposed on governmental entities, such as providing due process. This article makes three contributions to the literatures in financial regulation and constitutional law—disciplines which rarely interact. First, it provides a detailed account of how SROs became functionally integrated into the federal government and serve as federal law enforcement and regulators. Second, it shows how four different constitutional doctrines, now resurging under a conservative-majority Supreme Court, pose existential threats to existing SRO models. Third, the Article explains how Supreme Court decisions declaring SROs unconstitutional or limiting their powers generate systemic risk and may trigger a financial crisis.
{"title":"Supreme Risk","authors":"Benjamin Edwards","doi":"10.2139/ssrn.3907534","DOIUrl":"https://doi.org/10.2139/ssrn.3907534","url":null,"abstract":"While many have discussed the social issues that might arise because of a majority-conservative Supreme Court, one critical consequence of the current Supreme Court has been overlooked: the role of the Supreme Court in generating or avoiding systemic risk. For some time, systemic financial risk has been regulated by a mix of self-regulatory organizations (SROs), such as the Depository Trust Corporation, and federal regulators such as the Financial Stability Oversight Council. However, the Supreme Court’s recent jurisprudence now creates real risk that federal courts will declare keystone SROs unconstitutional because they do not fit neatly into an eighteenth-century constitutional framework. SROs are under-appreciated regulatory entities comprised of industry members regulating their own industries with deferential oversight from federal administrative agencies. While ordinary civics discussions entirely omit SROs, they play a critical legal and economic roles and exercise enormous power delegated to them by the federal government. Yet as nominally private entities, they enforce federal law and their own rules without abiding by the restrictions imposed on governmental entities, such as providing due process. This article makes three contributions to the literatures in financial regulation and constitutional law—disciplines which rarely interact. First, it provides a detailed account of how SROs became functionally integrated into the federal government and serve as federal law enforcement and regulators. Second, it shows how four different constitutional doctrines, now resurging under a conservative-majority Supreme Court, pose existential threats to existing SRO models. Third, the Article explains how Supreme Court decisions declaring SROs unconstitutional or limiting their powers generate systemic risk and may trigger a financial crisis.","PeriodicalId":11410,"journal":{"name":"Econometric Modeling: Capital Markets - Risk eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-08-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"84073386","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Employing the staggered short-sale deregulation on the Chinese stock market as quasi-exogenous shocks, we find that short selling threats is associated with higher corporate default risk, especially for firms that are more financially constrained, with higher growth rates, and higher information asymmetries. In addition, firms with higher ex-ante default risk experience an increase in the cost of debt and a reduction in new debt financing following the regulatory changes. The increase in default risk does not appear in U.S. listed firms in the context of the Regulation SHO’s pilot program. Overall, our findings indicate that short selling can adversely affect firm prospects through increasing the likelihood of default, especially in an environment where investors are more alien to short selling, short sellers are more able to be manipulative due to weak investor protection, and firms are lack of effective tools to avoid downside risk.
{"title":"Short Selling Threats and Corporate Default Risk: Evidence from the Chinese Stock Market","authors":"Xiaoran Ni, Hongmei Xu","doi":"10.2139/ssrn.3901069","DOIUrl":"https://doi.org/10.2139/ssrn.3901069","url":null,"abstract":"Employing the staggered short-sale deregulation on the Chinese stock market as quasi-exogenous shocks, we find that short selling threats is associated with higher corporate default risk, especially for firms that are more financially constrained, with higher growth rates, and higher information asymmetries. In addition, firms with higher ex-ante default risk experience an increase in the cost of debt and a reduction in new debt financing following the regulatory changes. The increase in default risk does not appear in U.S. listed firms in the context of the Regulation SHO’s pilot program. Overall, our findings indicate that short selling can adversely affect firm prospects through increasing the likelihood of default, especially in an environment where investors are more alien to short selling, short sellers are more able to be manipulative due to weak investor protection, and firms are lack of effective tools to avoid downside risk.","PeriodicalId":11410,"journal":{"name":"Econometric Modeling: Capital Markets - Risk eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88240319","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We introduce a new framework for understanding portfolio diversification that provides a coherent basis for comparing methodologies and offers a new approach to portfolio construction. The primary argument is that measures of diversification based only on a covariance matrix are ambiguous because in such a risk setting only the overall portfolio variance is of any import. To resolve this we propose that the purpose of diversification is most helpfully viewed as reducing the variance of portfolio variance itself, which in turn is only meaningful when one accounts for excess kurtosis. Connecting diversification and the variance of variance provides a natural extension to the ubiquitous mean-variance approach. Examples are provided to demonstrate the intuitive nature of portfolios that maximize diversification through minimizing kurtosis. Furthermore, we introduce portfolio dimensionality as a transformation of kurtosis that allows us to interpret diversification in terms of an equivalent number of assets with independent and identically distributed (IID) returns.
{"title":"Diversification and the Distribution of Portfolio Variance, Part 2: Volatility Stability as a Measure of Diversification","authors":"Brian Fleming, Jens Kroeske","doi":"10.2139/ssrn.3646432","DOIUrl":"https://doi.org/10.2139/ssrn.3646432","url":null,"abstract":"We introduce a new framework for understanding portfolio diversification that provides a coherent basis for comparing methodologies and offers a new approach to portfolio construction. The primary argument is that measures of diversification based only on a covariance matrix are ambiguous because in such a risk setting only the overall portfolio variance is of any import. To resolve this we propose that the purpose of diversification is most helpfully viewed as reducing the variance of portfolio variance itself, which in turn is only meaningful when one accounts for excess kurtosis. Connecting diversification and the variance of variance provides a natural extension to the ubiquitous mean-variance approach. Examples are provided to demonstrate the intuitive nature of portfolios that maximize diversification through minimizing kurtosis. Furthermore, we introduce portfolio dimensionality as a transformation of kurtosis that allows us to interpret diversification in terms of an equivalent number of assets with independent and identically distributed (IID) returns.","PeriodicalId":11410,"journal":{"name":"Econometric Modeling: Capital Markets - Risk eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-07-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"86306705","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Mouctar Bah, Koen Inghelbrecht, K. Schoors, Nicolas Soenen, Rudi Vander Vennet
We investigate the effectiveness of CoCo bonds as a credible recapitalization or resolution tool for distressed banks in Europe. Using yields on CoCo and senior bank bonds, we construct a CoCo premium to capture bank stress and we analyze whether or not this premium is related to bank systemic risk, captured by the marginal expected shortfall (MES), as well as individual bank risk. We find that increases of the CoCo spread are positively associated with both bank systemic risk and bank default risk. These results suggest that market participants do not consider CoCo bonds as ‘going concern’ capital. Since we also find that senior and subordinated bondholders perceive the probability of a bail-in as higher during times of an elevated CoCo premium, this implies that CoCo bonds are not considered as a credible recovery or resolution tool under the BRRD regime. Furthermore, the impact of CoCo bonds is not limited to bank-specific systemic and credit risk but also affects the risk profile of other banks. Our results suggest that policy actions are needed to render the European bank bail-in regime more credible.
{"title":"How Are Coco Bonds Perceived? Going Concern, Gone Concern, or None of the Above?","authors":"Mouctar Bah, Koen Inghelbrecht, K. Schoors, Nicolas Soenen, Rudi Vander Vennet","doi":"10.2139/ssrn.3882764","DOIUrl":"https://doi.org/10.2139/ssrn.3882764","url":null,"abstract":"We investigate the effectiveness of CoCo bonds as a credible recapitalization or resolution tool for distressed banks in Europe. Using yields on CoCo and senior bank bonds, we construct a CoCo premium to capture bank stress and we analyze whether or not this premium is related to bank systemic risk, captured by the marginal expected shortfall (MES), as well as individual bank risk. We find that increases of the CoCo spread are positively associated with both bank systemic risk and bank default risk. These results suggest that market participants do not consider CoCo bonds as ‘going concern’ capital. Since we also find that senior and subordinated bondholders perceive the probability of a bail-in as higher during times of an elevated CoCo premium, this implies that CoCo bonds are not considered as a credible recovery or resolution tool under the BRRD regime. Furthermore, the impact of CoCo bonds is not limited to bank-specific systemic and credit risk but also affects the risk profile of other banks. Our results suggest that policy actions are needed to render the European bank bail-in regime more credible.","PeriodicalId":11410,"journal":{"name":"Econometric Modeling: Capital Markets - Risk eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-07-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"77516580","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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