48,835 research outputs found
The probability of default in internal ratings based (IRB) models in Basel II: an application of the rough sets methodology
El nuevo Acuerdo de Capital de junio de 2004 (Basilea II) da cabida e incentiva la
implantaciĂłn de modelos propios para la mediciĂłn de los riesgos financieros en las
entidades de crédito. En el trabajo que presentamos nos centramos en los modelos internos
para la valoración del riesgo de crédito (IRB) y concretamente en la aproximación a uno de
sus componentes: la probabilidad de impago (PD).
Los métodos tradicionales usados para la modelización del riesgo de crédito, como son el
anĂĄlisis discriminante y los modelos logit y probit, parten de una serie de restricciones
estadĂsticas. La metodologĂa rough sets se presenta como una alternativa a los mĂ©todos
estadĂsticos clĂĄsicos, salvando las limitaciones de estos.
En nuestro trabajo aplicamos la metodologĂa rought sets a una base de datos, compuesta
por 106 empresas, solicitantes de créditos, con el objeto de obtener aquellos ratios que
mejor discriminan entre empresas sanas y fallidas, asĂ como una serie de reglas de decisiĂłn
que ayudarĂĄn a detectar las operaciones potencialmente fallidas, como primer paso en la
modelizaciĂłn de la probabilidad de impago. Por Ășltimo, enfrentamos los resultados obtenidos
con los alcanzados con el anĂĄlisis discriminante clĂĄsico, para concluir que la metodologĂa de
los rough sets presenta mejores resultados de clasificaciĂłn, en nuestro caso.The new Capital Accord of June 2004 (Basel II) opens the way for and encourages credit entities to implement
their own models for measuring financial risks. In the paper presented, we focus on the use of internal rating
based (IRB) models for the assessment of credit risk and specifically on the approach to one of their
components: probability of default (PD).
In our study we apply the rough sets methodology to a database composed of 106 companies, applicants for
credit, with the object of obtaining those ratios that discriminate best between healthy and bankrupt companies,
together with a series of decision rules that will help to detect the operations potentially in default, as a first step
in modelling the probability of default. Lastly, we compare the results obtained against those obtained using
classic discriminant anĂĄlisis. We conclude that the rough sets methodology presents better risk classification
results.Junta de AndalucĂa P06-SEJ-0153
Statistical modelling to predict corporate default for Brazilian companies in the context of Basel II using a new set of financial ratios
This paper deals with statistical modelling to predict failure of Brazilian companies in the light of the Basel II definition of default using a new set of explanatory variables. A rearrangement in the official format of the Balance Sheet is put forward. From this rearrangement a framework of complementary non-conventional ratios is proposed. Initially, a model using 22 traditional ratios is constructed. Problems associated with multicollinearity were found in this model. Adding a group of 6 non-conventional ratios alongside traditional ratios improves the model substantially. The main findings in this study are: (a) logistic regression performs well in the context of Basel II, yielding a sound model applicable in the decision making process; (b) the complementary list of financial ratios plays a critical role in the model proposed; (c) the variables selected in the model show that when current assets and current liabilities are split into two sub-groups - financial and operational - they are more effective in explaining default than the traditional ratios associated with liquidity; and (d) those variables also indicate that high interest rates in Brazil adversely affect the performance of those companies which have a higher dependency on borrowing
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Aggregate economy risk and company failure: An examination of UK quoted firms in the early 1990s
Considerable attention has been directed in the recent finance and economics literature to issues concerning
the effects on company failure risk of changes in the macroeconomic environment. This paper examines the
accounting ratio-based and macroeconomic determinants of insolvency exit of UK large industrials during
the early 1990s with a view to improve understanding of company failure risk. Failure determinants are
revealed from estimates based on a cross-section of 369 quoted firms, which is followed by an assessment
of predictive performance based on a series of time-to-failure-specific logit functions, as is typical in the
literature. Within the traditional for cross-sectional data studies framework, a more complete model of
failure risk is developed by adding to a set of traditional financial statement-based inputs, the two variables
capturing aggregate economy risk - one-year lagged, unanticipated changes in the nominal interest rate and
in the real exchange rate. Alternative estimates of prediction error are obtained, first, by analytically
adjusting the apparent error rate for the downward bias and, second, by generating holdout predictions.
More complete, augmented with the two macroeconomic variables models demonstrate improved out-ofestimation-
sample classificatory accuracy at risk horizons ranging from one to four years prior to failure,
with the results being quite robust across a wide range of cutoff probability values, for both failing and nonfailed
firms.
Although in terms of the individual ratio significance and overall predictive accuracy, the findings of the
present study may not be directly comparable with the evidence from prior research due to differing data
sets and model specifications, the results are intuitively appealing. First, the results affirm the important
explanatory role of liquidity, gearing, and profitability in the company failure process. Second, the findings
for the failure probability appear to demonstrate that shocks from unanticipated changes in interest and
exchange rates may matter as much as the underlying changes in firm-specific characteristics of liquidity,
gearing, and profitability. Obtained empirical determinants suggest that during the 1990s recession, shifts
in the real exchange rate and rises in the nominal interest rate, were associated with a higher propensity of
industrial company to exit via insolvency, thus indicating links to a loss in competitiveness and to the
effects of high gearing. The results provide policy implications for reducing the company sector
vulnerability to financial distress and failure while highlighting that changes in macroeconomic conditions
should be an important ingredient of possible extensions of company failure prediction models
Recommended from our members
Aggregate economy risk and company failure: An examination of UK quoted firms
Considerable attention has been directed in the recent finance and economics literature to issues concerning
the effects on company failure risk of changes in the macroeconomic environment. This paper examines the
accounting ratio-based and macroeconomic determinants of insolvency exit of UK large industrials during
the early 1990s with a view to improve understanding of company failure risk. Failure determinants are
revealed from estimates based on a cross-section of 369 quoted firms, which is followed by an assessment
of predictive performance based on a series of time-to-failure-specific logit functions, as is typical in the
literature. Within the traditional for cross-sectional data studies framework, a more complete model of
failure risk is developed by adding to a set of traditional financial statement-based inputs, the two variables
capturing aggregate economy risk - one-year lagged, unanticipated changes in the nominal interest rate and
in the real exchange rate. Alternative estimates of prediction error are obtained, first, by analytically
adjusting the apparent error rate for the downward bias and, second, by generating holdout predictions.
More complete, augmented with the two macroeconomic variables models demonstrate improved out-ofestimation-
sample classificatory accuracy at risk horizons ranging from one to four years prior to failure,
with the results being quite robust across a wide range of cut-off probability values, for both failing and
non-failed firms.
Although in terms of the individual ratio significance and overall predictive accuracy, the findings of the
present study may not be directly comparable with the evidence from prior research due to differing data
sets and model specifications, the results are intuitively appealing. First, the results affirm the important
explanatory role of liquidity, gearing, and profitability in the company failure process. Second, the findings
for the failure probability appear to demonstrate that shocks from unanticipated changes in interest and
exchange rates may matter as much as the underlying changes in firm-specific characteristics of liquidity,
gearing, and profitability. Obtained empirical determinants suggest that during the 1990s recession, shifts
in the real exchange rate and rises in the nominal interest rate, were associated with a higher propensity of
industrial company to exit via insolvency, thus indicating links to a loss in competitiveness and to the
effects of high gearing. The results provide policy implications for reducing the company sector
vulnerability to financial distress and failure while highlighting that changes in macroeconomic conditions
should be an important ingredient of possible extensions of company failure prediction models
Measuring and managing the credit exposure of derivatives portfolios
CONCLUSION The analysis of the exposure measurement problem has shown that the proper measurement of counterparty exposure for portfolios of derivatives transactions is a complex task that cannot be performed without making a lot of simplifying assumptions. Because of the complicated interaction of correlation effects and offsettings from different transactions, the single transaction framework which is currently used by most banks is definitely not capable of accurately determining the portfolio credit risk. When simulation techniques are applied to estimate exposure, the accuracy of exposure estimations can be increased significantly. However, a lot of modelling choices has to be made concerning the valuation of transactions and the stochastic model of underlying market rates. Because the system has to make projections of market rates into the far future, the choice of an appropriate stochastic model for market rate dynamics is crucial in order to prevent unreasonable scenarios. The predominant application of models based on Brownian Motion in todayâs bank risk management therefore leads to questionable results in respect to derivatives exposure evaluation
Analysing banking sector conditions - how to use macro-prudential indicators
This paper presents the methodological and statistical framework for macro-prudential analysis of the financial condition of the EU banking sector that has been adopted by the European System of Central Banks (ESCB). The framework is also a central component of broader financial stability assessments carried out by the ECB in co-operation with national authorities. The framework has three main building blocks, which draw on a large number of macro-prudential indicators. The first block is designed for assessing the financial condition of the banking sector. The second building block provides a framework for analysing potential sources of risk and vulnerability to which banks are exposed and an assessment of the importance of related exposures. The final part of the analysis deals with the resilience of banks vis-Ă -vis these different sources of risk and vulnerability. Analysing the impact of the identified risks on banksâ financial condition is the ultimate objective of the ESCB banking sector stability analysis.Financial stability, Banking sector, Macro-prudential analysis and indicators, Financial sector statistics.
Sustainable Retirement: A Look At Consumer Desires
This paper examines the findings of the research project, 'Retirement Savings: Drivers and Desires', commissioned by the Investment and Financial Services Association Ltd (IFSA) in 2001. The paper investigates retirement savings decision-making and retirement income product stream choice. This paper presents a quantitative analysis of questionnaire data relating to decision-making and product stream choice and discusses these issues in the context of established research findings about retirement income. The paper consists of five sections. The first is a brief review of the 'Drivers and Desires' research project conducted in 2001. An important theme to emerge from the initial project was that participants reported a high level of risk aversion and a strong desire to obtain the publicly funded age pension. Based on the findings of the initial project, the remaining sections of this paper focuses on consumer preferences, particularly relating to risk aversion and demand for the age pension. The second section focuses on a specific issue emanating from the initial project, specifically the market for annuities. The third section considers retirement income streams in terms of risks to investors. The fourth section carries out a quantitative analysis of consumer preferences toward the identified risks in previous sections, and specifically considers various trade-offs in the decision-making process. The fifth section outlines various policy alternatives and issues for future consideration.
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