A Quantile Monte Carlo approach to measuring extreme credit risk

We apply a novel Quantile Monte Carlo (QMC) model to measure extreme risk of various European industrial sectors both prior to and during the Global Financial Crisis (GFC). The QMC model involves an application of Monte Carlo Simulation and Quantile Regression techniques to the Merton structural credit model. Two research questions are addressed in this study. The first question is whether there is a significant difference in distance to default (DD) between the 50% and 95% quantiles as measured by the QMC model. A substantial difference in DD between the two quantiles was found. The second research question is whether relative industry risk changes between the pre-GFC and GFC periods at the extreme quantile. Changes were found with the worst deterioration experienced by Energy, Utilities, Consumer Discretionary and Financials; and the strongest improvement shown by Telecommunication, IT and Consumer goods. Overall, we find a significant increase in credit risk for all sectors using this model as compared to the traditional Merton approach. These findings could be important to banks and regulators in measuring and providing for credit risk in extreme circumstances.Asset Selection, Factor Model, DEA, Quantile Regression

Peas in a pod: Canadian and Australian banks before and during a Global Financial Crisis

In the aftermath of the Global Financial Crisis (GFC), the Canadian and Australian banking systems have been singled out by some commentators as having performed better than many other banking systems, particularly those in Europe, America and the United Kingdom. Banks in both Canada and Australia, for instance, have continued to report enviable earnings, sound capital levels, and high credit ratings both before and during the GFC. The G-20 and the European Union have tried to identify the features of the Canadian and Australian financial systems which have underpinned this success in order to use them in shaping a revised international regulatory framework. One area of focus has been the regulations governing “quality of capital”. Despite these apparent successes, there is some evidence that both Canadian and Australian banks experienced considerable deterioration in the market value of their assets during the GFC. In this paper we use the KMV / Merton structural methodology, which incorporates market asset values, to examine default probabilities of 9 listed Canadian banks and 13 Australian listed banks in both a pre-GFC period (2000-2006) and a GFC period (2007-2008). We also modify the model to incorporate conditional probability of default which measures extreme credit risk. This paper finds that bank risk was significantly similar for Australian and Canadian Banks during the GFC period. This includes an assessment of impaired assets, Value at Risk (VaR) and Distance to Default (DD), as well as the extreme measures of Conditional VaR (CVaR), and Conditional Distance to Default (CDD); metrics which confirm the two countries similarities in terms of a significant increase in credit risk between pre-GFC and GFC periods. The extent of this increase was, however, far more pronounced for Australia, which was coming off a lower base. Bank risk for both countries was found to be far lower than for global counterparts due to factors such as sound regulatory control and low levels of involvement in sub-prime lending. This could provide lessons for global banks on risk management. A key conclusion of the paper is that it is important that fluctuating market values, especially the extreme fluctuations which are measured by CVaR and CDD, are a key consideration when determining risk management criteria such as capital adequacy

The Impact of Contagion on Non-Performing Loans: Evidence from Australia and Canada

Despite Canadian and Australian banks being widely perceived as having weathered the storm of the Global Financial Crisis (GFC) very successfully, the impaired assets (also known as non-performing loans) of both these two countries increased several fold during this crisis. Previous studies in other countries have tended to focus on the impact of bank specific factors, such as size and return on equity, in explaining bank risk. Our approach involves including those traditional variables, plus Distance to Default (DD), and a novel contagion variable, which is the effect of major global bank DD on Australian and Canadian non-performing loans. The study incorporates all twenty two listed Australian and Canadian Banks and uses a fixed effects panel data regression over the period 1999-2008. Robustness checks include correlation and VIF analysis as well a two stage least squares model as an alternative. We find that bank specific balance sheet and income statement factors are not good explanatory variables for bank risk. In contrast, the contagion variable is significant in explaining Canadian and Australian bank risk, which suggests that prudential regulators should look to specifically allocate a portion of regulatory capital to deal with contagion effects

Comparative Analysis of Heart Rate Variability Between Traditional Sets and Rest Redistribution

Resistance exercise methods have different effects on the cardiovascular system. During skeletal muscular contraction, heart rate increases while heart rate variability (HRV) decreases. HRV is thought to represent the complex interaction between the sympathetic and parasympathetic branches of the autonomic nervous system. PURPOSE: This study analyzed heart rate variability during two methods of resistance exercise, traditional sets (TS) and rest redistribution sets (RR), both containing the same volume and total rest time. METHODS: Twenty-five participants (Mean ± SD: Age= 22.4 ± 3.7 y.; height = 167.5 ± 9.7 cm; body mass = 72.7 ± 14.7 kg) completed 40 repetitions of the barbell squat with 65% 1RM load. Participants completed TS (4 sets of 10 repetitions, 3-minute rest) and RR (10 sets of 4 repetitions, 1-minute rest), in a randomized order on separate days. HRV was collected from each participant using a heart rate monitor. The HRV was analyzed using a specialized software. Average windows were developed to calculate the root mean square of successive differences (RMSSD) between normal heartbeats and stress index (SI) at rest, during the exercise session, and during recovery. Log transformation was performed in the case of a violation of the normality assumption. Paired t-tests were used to compare RMSSD and SI responses at initial rest, during exercise and recovery between TS and RR. RESULTS: During the initial rest period, there were no statistical differences between RR and TS in RMSSD (p=0.36; 7.85 ± 44.2 vs. 9.14 ± 6.63, respectively or SI (p=0.81; 3.50 ± 0.43 vs. 3.41 ±0.60, respectively). However, there were statistical significance for both RMSSD (pCONCLUSION: While the vagal response does not seem to be affected by training method during recovery, stress responses were higher during RR than TS exercise, as measured by HRV. Future studies can examine HRV behavior during exercise and establish its relationship to other physiological and perceptual markers

Survival Of The Fittest: Contagion as a Determinant of Canadian and Australian Bank Risk

The relative success of Australian and Canadian banks in weathering the Global Financial Crisis (GFC) has been noted by a number of commentators. Their earnings, capital levels and credit ratings have all been a source of envy for regulators of banks in Europe, America and the United Kingdom. The G-20 and the European Union have tried to identify the features of the Canadian and Australian financial systems which have underpinned this success in order to use them in shaping a revised international regulatory framework. Despite this perceived success, the impaired assets (also known as non-performing loans) of banks in both countries increased several fold over the GFC, and we investigate the determinants of this, using impaired assets as our measure of bank risk. Previous studies in other countries have tended to focus on the impact of bank specific factors, such as size and return on equity, in explaining bank risk. Our approach involves including those traditional variables, plus Distance to Default (DD), and a novel contagion variable, which is the effect of major global bank DD on Australian and Canadian banks. Using panel data regression over the period 1999-2008, we find that various balance sheet and income statement factors are not good explanatory variables for bank risk. In contrast, the contagion variable is significant in explaining Canadian and Australian bank risk, which suggests that prudential regulators should look to specifically allocate a portion of regulatory capital to deal with contagion effects

Thumbs Up to Parametric Measures of Relative VaR and CVaR in Indonesian Sectors

We examine relative share market risk between Indonesian sectors and how this changes during extreme market fluctuations. Ten sectors comprising the IDX Composite Index are examined over an eight-year period spanning the pre-GFC, GFC and post-GFC. Risk is measured using parametric and nonparametric Value at Risk (VaR) and Conditional Value at Risk (CVaR), which measures risk beyond VaR. In contrast to studies on most global markets, and due to relative stability in the Indonesian market, no significant differences are found in relative portfolio risk between the conditional and non-conditional measures, or between parametric and nonparametric measures. The insights are important to investors in choosing the sectoral mix of their portfolio

Accumulated Oxygen Deficit During Arm Cranking in Hypoxia: A Bayesian Perspective and Methodological Considerations

International Journal of Exercise Science 14(3): 1090-1098, 2021. The purpose of this investigation was to observe the effects of normobaric hypoxia on accumulated oxygen deficit (AOD) with evaluation using both Bayesian and Frequentist analyses. Eighteen recreationally active men performed a graded exercise test (GXT) in normobaric normoxia (N; FiO2~20%) and normobaric hypoxia (H; FiO2~14%) to determine peak power output (PPO). Time to exhaustion trials were later conducted at 110% and 120% PPO under both N, and H. AOD and %AN (% anaerobic energy contribution) were calculated in three conditions: N, H, and H using the N regression equation (HN). Bayesian repeated measures ANOVA revealed differences in AOD and %AN between regression equations while Frequentist Repeated measures ANOVA revealed non-significant differences for AOD (p = .148) and %AN (p = .150). Using predicted oxygen consumption extrapolated from a normoxic environment during exercise in hypoxia may lead to overestimation of AOD and %AN with a Bayesian approach and contrasting results using frequentist statistics