Stress testing: The impact of shocks on the capital needs of the Luxembourg banking sector

We use data on loan loss provisions and total loans over the period spanning 1995 until 2009 to estimate a stress testing model for the Luxembourg banking sector. The sample encompasses the recent global crisis and covers a period in which the average probability of default of the Luxembourg banking sector?s counterparties is observed to increase significantly. A joint model, consisting of several macroeconomic variables and the logit-transformed probability of default, is specified and estimated via seemingly unrelated regression (SUR). The results suggest that counterparty default rates are significantly affected by the euro area real GDP growth rate, the real interest rate and a domestic property price index. Conversely, changes in the Luxembourg real GDP growth rate have a much smaller effect on counterparty risk. We attribute this to the large number of foreign subsidiaries operating within Luxembourg. The estimated model is then used to simulate values of the probability of default and the macroeconomic variables over a horizon of 10 quarters. This allows us to construct distributions for the probability of default under both baseline and adverse scenarios. From the results of these simulations stressed Basel II tier 1 capital ratios are calculated and compared to their associated unstressed capitalization levels. Our calculations suggest that, under all the given adverse macroeconomic scenarios, the aggregate Luxembourg financial sector remains above the 4% minimum Basel II tier 1 capital requirement. Repeating the exercise on a limited sample of 5 individual banks produces similar results.financial stability; stress testing; Luxembourg banking sector; tier 1 capital ratio; counterparty risk

Barrier option pricing using adjusted transition probabilities

In the existing literature on barrier options much effort has been exerted to ensure convergence through placing the barrier in close proximity to, or directly onto, the nodes of the tree lattice. For a variety of barrier option types we show that such a procedure may not be a necessary prerequisite to achieving accurate option price approximations. Using the Kamrad and Ritchken (1991) trinomial tree model we show that with a suitable transition probability adjustment our “probability adjusted” model exhibits convergence to the barrier option price. We study the convergence properties of several option types including exponential barrier options, single linear time-varying barrier options, double linear timevarying barriers options and Bermuda options. For options whose strike price is close to the barrier we are able to obtain numerical results where other models and techniques typically fail. Furthermore, we show that it is possible to calculate accurate option price approximations with minimal effort for options with complicated barriers that defeat standard techniques. In no single case does our method require a repositioning of the pricing lattice nodes

On the lease rate, convenience yield and speculative effects in the gold futures market

By examining data on the gold forward offered rate (GOFO) and lease rates over the period 1996- 2009, we conclude that the convenience yield of gold is better approximated by the lease rate than the interest-adjusted spread of Fama & French (1983). Using the latter quantity, we study the relationship between gold leasing and the level of COMEX discretionary inventory and exhibit that lease rates are negatively related to inventories. We also show that Futures prices have increasingly exceeded forward prices over the period, and this effect increases with the speculative pressure and the maturity of the contracts

On the lease rate, the convenience yield and speculative effects in the gold futures market

À travers l’examen du marché de l’emprunt d’or et l’utilisation à la fois des données relatives aux taux à terme offerts sur ce marché (GOFO) et aux taux du leasing de l’or, nous suggérons l’adoption de ce dernier taux comme étant une > pour quantifier le rendement de l’or. Une telle approche permet de remédier aux insuffisances d’une approximation par un adjustement du différentiel de taux (interest-adjusted basis). En effet, l’utilisation de ce dernier est sujette à des biais d’inférence aboutissant à une estimation erronée du rendement de l’actif en question. Dans ce contexte, il est naturel d’utiliser le taux le plus approprié, en l’occurrence le taux d’emprunt (lease rate) pour étudier la relation entre l’emprunt de l’or et le niveau d’inventaire du COMEX. Enfin, notre analyse révèle que la présence de spéculateurs sur les marchés des contrats à terme est un facteur d’accroissement à la fois des rendements, mais aussi des maturités des contrats futures.By examining the gold leasing market and employing data on the gold forward offered rate (GOFO) and derived lease rates, we propose that rather than using the interest-adjusted basis as a proxy for the convenience yield of gold, the convenience yield is better approximated by the derived gold lease rate. Additionally, using the interest-adjusted basis as opposed to the lease rate can lead to incorrect inferences pertaining to the convenience yield. Using the lease rate, we study the relationship between gold leasing and the level of COMEX discretionary inventory. The results suggest that the lease rate has an asymmetric relationship with the level of discretionary inventory, which we calculate using weekly inventory data obtained from the COMEX futures trading exchange. Linear regressions of the level of discretionary inventory on lagged lease rates reveal that lease rate tenors of 1, 3 and 6 months have a negative effect on the level of discretionary inventory. After controlling for speculative effects we find that for bullion leases exceeding one month in duration inventory levels are dominated by speculative effects rather than lease rates. Furthermore, this speculative activity acts to increase the amount of bullion available to the gold futures market by decreasing the repayment effect. Finally, we show that the presence of speculation in gold futures contracts can be associated with increased futures contract returns and that this effect increases with increased futures contract maturity. These results suggest that speculation plays a significant role in the COMEX gold futures market

On the Lease Rate, the Convenience Yield and Speculative Effects in the Gold Futures Market

By examining the gold leasing market and employing data on the gold forward offered rate (GOFO) and derived lease rates, we propose that rather than using the interest-adjusted basis as a proxy for the convenience yield of gold, the convenience yield is better approximated by the derived gold lease rate. Additionally, using the interest-adjusted basis as opposed to the lease rate can lead to incorrect inferences pertaining to the convenience yield. Using the lease rate, we study the relationship between gold leasing and the level of COMEX discretionary inventory. The results suggest that the lease rate has an asymmetric relationship with the level of discretionary inventory, which we calculate using weekly inventory data obtained from the COMEX futures trading exchange. Linear regressions of the level of discretionary inventory on lagged lease rates reveals that, for short-duration gold leases, bullion repayments result in decreased inventory levels. After controlling for speculative effects, we show that only leases of one month maturity have a statistically significant effect on inventory levels, and thus conclude that speculative pressure acts to increase the amount of bullion available to the gold futures market by decreasing the repayment effect. Finally, we show that the presence of speculation in gold futures contracts can be associated with increased futures contract returns and that this effect increases with increased futures contract maturity. These results suggest that speculation plays a significant role in the COMEX gold futures market.central bank, commitments of traders, commodity market, convenience yield, gold futures, gold leasing, speculation

Barrier Option Pricing Using Adjusted Transition Probabilities

In the existing literature on barrier options, much effort has been exerted to ensure convergence through placing the barrier in close proximity to, or directly onto, the nodes of the tree lattice. In this paper we show that this may not be necessary to achieve accurate option price approximations. Using the Cox/Ross/Rubinstein binomial tree model and a suitable transition probability adjustment we demonstrate that our “probability-adjusted” model exhibits increased convergence to the analytical option price. We study the convergence properties of various types of options including (but not limited to) double knock-out, exponential barrier, double (constant) linear barriers and linear time-varying barriers. For options whose strike price is close to the barrier we are able to obtain numerical results where other models fail and, although convergence tends to be slow, we are able to calculate reasonable approximations to the analytical option price without having to reposition the lattice nodes.barrier option, binomial tree, convergence rate, transition probability

Screening Patterns of Nonalcoholic Fatty Liver Disease in Children with Obesity in Canadian Primary Care: A Cross-Sectional Study

Background. Nonalcoholic fatty liver disease (NAFLD) is the most common pediatric chronic liver disease, and children with a body mass index (BMI) ≥95th percentile are recommended to be screened for NAFLD by liver enzymes. Objectives. This study aimed to determine the frequency and predictors of screening for NAFLD among children with obesity in Canada and to evaluate a sample of children with suspected NAFLD. Methods. This cross-sectional study used data from the Canadian Primary Care Sentinel Surveillance Network, a repository of electronic medical record data from Canadian primary care practices. Results. Of n = 110,827 children aged 9–18 years, 13.9% (n = 9,888) had a BMI ≥95th percentile. Only 8.7% (n = 859) of these patients were screened for NAFLD in the last year, and 23.6% (n = 2336) were ever screened. Using logistic regression, screening in the last year was associated with demographic and clinical characteristics, including previous liver enzyme assessment, prior antidiabetic prescription, and prior anxiolytic prescription. Among children with suspected NAFLD (n = 1,046), 34.7% had a BMI ≥99th percentile and approximately 8% were at increased risk of significant liver disease. Conclusion. The study revealed low screening rates for NAFLD in Canadian primary care and highlighted the important role of primary care providers in identifying and managing pediatric NAFLD