Derivatives and Credit Contagion in Interconnected Networks

The importance of adequately modeling credit risk has once again been highlighted in the recent financial crisis. Defaults tend to cluster around times of economic stress due to poor macro-economic conditions, {\em but also} by directly triggering each other through contagion. Although credit default swaps have radically altered the dynamics of contagion for more than a decade, models quantifying their impact on systemic risk are still missing. Here, we examine contagion through credit default swaps in a stylized economic network of corporates and financial institutions. We analyse such a system using a stochastic setting, which allows us to exploit limit theorems to exactly solve the contagion dynamics for the entire system. Our analysis shows that, by creating additional contagion channels, CDS can actually lead to greater instability of the entire network in times of economic stress. This is particularly pronounced when CDS are used by banks to expand their loan books (arguing that CDS would offload the additional risks from their balance sheets). Thus, even with complete hedging through CDS, a significant loan book expansion can lead to considerably enhanced probabilities for the occurrence of very large losses and very high default rates in the system. Our approach adds a new dimension to research on credit contagion, and could feed into a rational underpinning of an improved regulatory framework for credit derivatives.Comment: 26 pages, 7 multi-part figure

Epistemological and interpersonal stance in a data description task : findings from a discipline-specific learner corpus

This article examines the stance options used by writers responding to a data description task in the discipline of Statistics. Based on a small learner corpus, it uses inductive qualitative content analysis to explore both the content propositions that students included in their writing, and the ways in which they expressed evaluative stance vis-à-vis such propositions. In the light of an interview with a specialist informant, the article discusses the appropriacy of the content choices and stance options taken by students. It then discusses the potential exploitation of the learner corpus for pedagogic purposes

At the Water’s Hedge: International Insider-Trading Enforcement After Morrison

From copy rooms to boardrooms, many Americans have succumbed to the siren song of insider trading. As U.S. companies have gone international, so too have corporate secrets ripe for exploitation. With the growth of overseas derivatives based on U.S. stock, foreigners are able to engage in insider trading to a similar extent as Americans. But in Morrison v. National Australia Bank, the Supreme Court limited the reach of the statutory insider-trading prohibition to transactions taking place in U.S. territory or transactions in securities listed on U.S. exchanges. Neither condition applies to overseas insider trading using derivatives. However, courts have reasoned that when the trader’s broker hedges by buying stock on a U.S. exchange, that transaction can be attributed to the trader, thus bringing the scheme within Morrison. This hedging theory depends on the acts of third parties—the brokers—to create insider-trading liability, thus giving arbitrary windfalls to blameworthy traders and creating both evidentiary and legal hurdles for U.S. enforcement. Because Morrison has backed courts into this unworkable corner, it should not govern in insider-trading cases. There is a fix: the Dodd-Frank Wall Street Reform and Consumer Protection Act abrogated Morrison for enforcement actions, albeit imperfectly. By abandoning the theory in favor of Dodd-Frank’s pragmatic standard, courts can more nimbly and forcefully protect U.S. markets from foreign fraud

Hedged Assertion

Surprisingly little has been written about hedged assertion. Linguists often focus on semantic or syntactic theorizing about, for example, grammatical evidentials or epistemic modals, but pay far less attention to what hedging does at the level of action. By contrast, philosophers have focused extensively on normative issues regarding what epistemic position is required for proper assertion, yet they have almost exclusively considered unqualified declaratives. This essay considers the linguistic and normative issues side-by-side. We aim to bring some order and clarity to thinking about hedging, so as to illuminate aspects of interest to both linguists and philosophers. In particular, we consider three broad questions. 1) The structural question: when one hedges, what is the speaker’s commitment weakened from? 2) The functional question: what is the best way to understand how a hedge weakens? And 3) the taxonomic question: are hedged assertions genuine assertions, another speech act, or what

Time Varying Risk Aversion: An Application to Energy Hedging

Risk aversion is a key element of utility maximizing hedge strategies; however, it has typically been assigned an arbitrary value in the literature. This paper instead applies a GARCH-in-Mean (GARCH-M) model to estimate a time-varying measure of risk aversion that is based on the observed risk preferences of energy hedging market participants. The resulting estimates are applied to derive explicit risk aversion based optimal hedge strategies for both short and long hedgers. Out-of-sample results are also presented based on a unique approach that allows us to forecast risk aversion, thereby estimating hedge strategies that address the potential future needs of energy hedgers. We find that the risk aversion based hedges differ significantly from simpler OLS hedges. When implemented in-sample, risk aversion hedges for short hedgers outperform the OLS hedge ratio in a utility based comparison

Creditworthiness and Matching Principles

You are creditworthy for φ-ing only if φ-ing is the right thing to do. Famously though, further conditions are needed too – Kant’s shopkeeper did the right thing, but is not creditworthy for doing so. This case shows that creditworthiness requires that there be a certain kind of explanation of why you did the right thing. The reasons for which you act – your motivating reasons – must meet some further conditions. In this paper, I defend a new account of these conditions. On this account, creditworthiness requires that your motivating reasons be normative reasons, and that the principles from which you act match normative principles

Hedging the exchange rate risk in international portfolio diversification : currency forwards versus currency options

As past research suggest, currency exposure risk is a main source of overall risk of international diversified portfolios. Thus, controlling the currency risk is an important instrument for controlling and improving investment performance of international investments. This study examines the effectiveness of controlling the currency risk for international diversified mixed asset portfolios via different hedge tools. Several hedging strategies, using currency forwards and currency options, were evaluated and compared with each other. Therefore, the stock and bond markets of the, United Kingdom, Germany, Japan, Switzerland, and the U.S, in the time period of January 1985 till December 2002, are considered. This is done form the point of view of a German investor. Due to highly skewed return distributions of options, the application of the traditional mean-variance framework for portfolio optimization is doubtful when options are considered. To account for this problem, a mean-LPM model is employed. Currency trends are also taken into account to check for the general dependence of time trends of currency movements and the relative potential gains of risk controlling strategies