Forecasting bank loans loss-given-default

With the advent of the new Basel Capital Accord, banking organizations are invited to estimate credit risk capital requirements using an internal ratings based approach. In order to be compliant with this approach, institutions must estimate the expected loss-given-default, the fraction of the credit exposure that is lost if the borrower defaults. This study evaluates the ability of a parametric fractional response regression and a nonparametric regression tree model to forecast bank loan credit losses. The out-of-sample predictive ability of these models is evaluated at several recovery horizons after the default event. The out-of-time predictive ability is also estimated for a recovery horizon of one year. The performance of the models is benchmarked against recovery estimates given by historical averages. The results suggest that regression trees are an interesting alternative to parametric models in modeling and forecasting loss-given-default.Loss-given-default, Forecasting, Bank loans, Fractional response regression, Regression trees

Network Information Flow in Small World Networks

Recent results from statistical physics show that large classes of complex networks, both man-made and of natural origin, are characterized by high clustering properties yet strikingly short path lengths between pairs of nodes. This class of networks are said to have a small-world topology. In the context of communication networks, navigable small-world topologies, i.e. those which admit efficient distributed routing algorithms, are deemed particularly effective, for example in resource discovery tasks and peer-to-peer applications. Breaking with the traditional approach to small-world topologies that privileges graph parameters pertaining to connectivity, and intrigued by the fundamental limits of communication in networks that exploit this type of topology, we investigate the capacity of these networks from the perspective of network information flow. Our contribution includes upper and lower bounds for the capacity of standard and navigable small-world models, and the somewhat surprising result that, with high probability, random rewiring does not alter the capacity of a small-world network.Comment: 23 pages, 8 fitures, submitted to the IEEE Transactions on Information Theory, November 200

An empirical analysis of structural models of corporate debt pricing

This paper tests empirically the performance of three structural models of corporate bond pricing, namely Merton (1974), Leland (1994) and Fan and Sundaresan (2000). While the first two models overestimate bond prices, the Fan and Sundaresan model reveals an extremely good performance. When considering the prediction of credit spreads, the three models under-estimate market spreads but, again, Fan and Sundaresan has a better performance. We find rating, maturity and asset volatility effects in the prediction power, as the models under-estimate less the spreads of riskier firms and of bonds with better rating quality and longer maturity. Moreover, our results reveal the existence of a new industry effect. Spread errors are systematically related to some bond- and firm-specific variables, as well as term structure variables.structural models, corporate debt valuation, empirical credit spreads

The structure of international stock market returns

The behavior of international stock market returns in terms of their distributional properties, serial dependence, long-memory and conditional volatility is examined. A factor analysis is employed to identify the underlying dimensions of the returns. The analysis reveals the existence of meaningful factors when these are estimated from the empirical properties of a large set of international equity indices. Furthermore, the factor scores discriminate very well the stock markets according to size and level of development.International stock markets; Serial dependence; Long-memory; Conditional volatility; Factor analysis.

Recurrence quantification analysis of global stock markets

This study investigates the presence of deterministic dependencies in international stock markets using recurrence plots and recurrence quantification analysis (RQA). The results are based on a large set of free float-adjusted market capitalization stock indices, covering a period of 15 years. The statistical tests suggest that the dynamics of stock prices in emerging markets is characterized by higher values of RQA measures when compared to their developed counterparts. The behavior of stock markets during critical financial events, such as the burst of the technology bubble, the Asian currency crisis, and the recent subprime mortgage crisis, is analyzed by performing RQA in sliding windows. It is shown that during these events stock markets exhibit a distinctive behavior that is characterized by temporary decreases in the fraction of recurrence points contained in diagonal and vertical structures.Recurrence plot, Recurrence quantification analysis, Nonlinear dynamics, International stock markets

New members of the TW Hydrae Association and two accreting M-dwarfs in Scorpius-Centaurus

We report the serendipitous discovery of several young mid-M stars found during a search for new members of the 30-40 Myr-old Octans Association. Only one of the stars may be considered a possible Octans(-Near) member. However, two stars have proper motions, kinematic distances, radial velocities, photometry and Li I 6708AA measurements consistent with membership in the 8-10 Myr-old TW Hydrae Association. Another may be an outlying member of TW Hydrae but has a velocity similar to that predicted by membership in Octans. We also identify two new lithium-rich members of the neighbouring Scorpius-Centaurus OB Association (Sco-Cen). Both exhibit large 12 and 22 micron excesses and strong, variable H-alpha emission which we attribute to accretion from circumstellar discs. Such stars are thought to be incredibly rare at the ~16 Myr median age of Sco-Cen and they join only one other confirmed M-type and three higher-mass accretors outside of Upper Scorpius. The serendipitous discovery of two accreting stars hosting large quantities of circumstellar material may be indicative of a sizeable age spread in Sco-Cen, or further evidence that disc dispersal and planet formation time-scales are longer around lower-mass stars. To aid future studies of Sco-Cen we also provide a newly-compiled catalogue of 305 early-type Hipparcos members with spectroscopic radial velocities sourced from the literature.Comment: 12 pages. Accepted for publication in MNRA

Do banks price their informational monopoly?

Modern corporate finance theory argues that although bank monitoring is beneficial to borrowers, it also allows banks to use the private information they gain through monitoring to "hold-up" borrowers for higher interest rates. In this paper, we seek empirical evidence for this information hold-up cost. Since new information about a firm's credit-worthiness is revealed at the time of its first issue in the public bond market, it follows that after firms undertake their bond IPO, banks with an exploitable information advantage will be forced to adjust their loan interest rates downwards, particularly for firms that are revealed to be safe. Our findings show that firms are able to borrow from banks at lower interest rates after they issue for the first time in the public bond market and that the magnitude of these savings is larger for safer firms. We further find that among safe firms, those that get their first credit rating at the time of their bond IPO benefit from larger interest rate savings than those that already had a credit rating when they entered the bond market. Since more information is revealed at the time of the bond IPO on the former firms and since this information will increase competition from uninformed banks, these findings provide support for the hypothesis that banks price their informational monopoly. Finally, we find that while entering the public bond market may reduce these informational rents, it is costly to firms because they have to pay higher underwriting costs on their IPO bonds. Moreover, IPO bonds are subject to more underpricing than subsequent bonds when they first trade in the secondary bond market.Corporate bonds ; Credit ratings