Estimating expectations of shocks using option prices

The jump-diffusion model introduced by Merton is used to price a cross- section of options at different dates. At any point in time, the parameters of the model are estimated by minimizing the sum of squared implied volatility errors, and their informational content is compared with the widely used Black and Scholes implied volatility, calculated on at-the-money options. While in normal conditions the parameters of Merton's model do not seem to provide any additional information, in periods of high variability of asset prices the jump-diffusion approach may help to disentangle the cases in which volatility reflects only uncertainty on economic fundamentals from those in which it is fuelled by fears of ¯nancial crisis.jump-diffusion stochastic processes, option pricing, volatility

An analysis of the determinants of credit default swap spread changes before and during the subprime financial turmoil

This paper analyzes the determinants of credit default swap spread changes for a large sample of US non-financial companies over the period between January 2002 and March 2009. In our analysis we use variables that the literature has found have an impact on CDS spreads and, in order to account for possible non-linear effects, the theoretical CDS spreads predicted by the Merton model. We show that our set of variables is able to explain more than 50% of CDS spread variations both before and after July 2007, when the current financial turmoil began. We also document that since the onset of the crisis CDS spreads have become much more sensitive to the level of leverage while volatility has lost its importance. Using a principal component analysis we also show that since the beginning of the crisis CDS spread changes have been increasingly driven by a common factor, which cannot be explained by indicators of economic activity, uncertainty, and risk aversion.credit default swaps, bond spreads, credit risk, Merton model

Do market-based indicators anticipate rating agencies? Evidence for international banks

This paper analyzes the ability of credit default swap spreads, bond spreads and stock prices to anticipate the decisions of the main rating agencies, for the largest international banks. Conditional on negative rating events, all the three indicators show signi¯cant abnormal changes before both announcements of review and actual credit rating changes, but rating actions still seem to convey new information to the market. Results for positive rating events are less clear-cut with the market indicators generally showing abnormal behaviors only in conjunction with the events. As for the predictive power of the ¯nancial indicators examined, the CDS market is particularly useful for negative events and stock prices for positive events. However, all indicators also send many false signals and are to be interpreted with care.Credit derivatives, credit default swaps, option-adjusted spreads,credit ratingss

Securitization and Bank Stability

This paper analyzes the effects of CDO issuance on the risk of default of banks. Previous literature showed that the overall riskiness of a bank can increase when it sells part of the loans in its portfolio by issuing a CDO of which it retains the equity tranche. Using Monte Carlo simulations, this paper confirms previous results but also highlights that they can change substantially if one modifies the hypothesis regarding how the proceeds of securitizations are reinvested. The assessment of the effects of securitizations on bank stability is thus mainly a matter of empirical research. Using data for Italian banks I provide evidence that the securitization activity has been a relevant factor in changing the composition of the asset side of banks' balance sheets. Results also show that these changes have probably contributed to lower the average ex-ante riskiness of Italian banks. I also compare the riskiness of loans that have been securitized with that of new loans granted by the same securitizing banks using loan-by-loan data. Results show that new loans are on average riskier than loans that have been securitized, thus pointing to an increasing amount of risk to be born by banks as a consequence of the reinvestment of the proceeds of securitizations.Bank stability, CDOs, Value-at-Risk, bank capital structure, Monte Carlo simulations

Seismic Retrofit of Reinforced Concrete Frame Buildings with Hysteretic Bracing Systems: Design Procedure and Behaviour Factor

This paper presents a design procedure to evaluate the mechanical characteristics of hysteretic Energy Dissipation Bracing (EDB) systems for seismic retrofitting of existing reinforced concrete framed buildings. The proposed procedure, aiming at controlling the maximum interstorey drifts, imposes a maximum top displacement as function of the seismic demand and, if needed, regularizes the stiffness and strength of the building along its elevation. In order to explain the application of the proposed procedure and its capacity to involve most of the devices in the energy dissipation with similar level of ductility demand, a simple benchmark structure has been studied and nonlinear dynamic analyses have been performed. A further goal of this work is to propose a simplified approach for designing dissipating systems based on linear analysis with the application of a suitable behaviour factor, in order to achieve a widespread adoption of the passive control techniques. At this goal, the increasing of the structural performances due to the addition of an EDB system designed with the above-mentioned procedure has been estimated considering one thousand case studies designed with different combinations of the main design parameters. An analytical formulation of the behaviour factor for braced buildings has been proposed

Securitization and Bank Stability

This paper analyzes the effects of CDO issuance on the risk of default of banks. Previous literature showed that the overall riskiness of a bank can increase when it sells part of the loans in its portfolio by issuing a CDO of which it retains the equity tranche. Using Monte Carlo simulations, this paper confirms previous results but also highlights that they can change substantially if one modifies the hypothesis regarding how the proceeds of securitizations are reinvested. The assessment of the effects of securitizations on bank stability is thus mainly a matter of empirical research. Using data for Italian banks I provide evidence that the securitization activity has been a relevant factor in changing the composition of the asset side of banks' balance sheets. Results also show that these changes have probably contributed to lower the average ex-ante riskiness of Italian banks. I also compare the riskiness of loans that have been securitized with that of new loans granted by the same securitizing banks using loan-by-loan data. Results show that new loans are on average riskier than loans that have been securitized, thus pointing to an increasing amount of risk to be born by banks as a consequence of the reinvestment of the proceeds of securitizations

Nonlinear analysis of base isolated buildings with curved surface sliders including over-stroke displacements

eismic isolation represents one of the most suitable strategies for mitigating the seismic risk of structures and infrastructures. Acceptable probabilities of collapse for seis-mically isolated buildings could be achieved by an appropriate isolator displacement capacity. This paper investigates the effects of the over-stroke capacity of double concave curved sur-face sliding isolators, in addition to the nominal displacement capacity, on the seismic response of base isolated structures. The case study building is a reinforced concrete frame structure designed for high hazard seismic site. The level of performance of global collapse prevention has been investigated considering the earthquake intensity levels at the Collapse Limit State (with a return period of 1000 years). The results of the nonlinear static and dynamic analysis highlights that the seismic isolation without the over-stroke capability show a limited margin against collapse for seismic intensities beyond the design limit state lev

Risks of Leveraged Products

Leveraged investments have become a fundamental feature of modern economies. The new financial products allow people to take greater-than-usual exposures to risk factors. This thesis analyzes several different aspects of the risks involved by some frequently used leveraged products: CDOs, CDSs, and hedge funds. It is shown that these risks have indeed several facets and that misjudging them can have severe effects for both individual investors and the global financial stability. However, although leveraged products can be more complex than other financial instruments, their characteristics in terms of risks and returns can usually be understood rather well by careful scholars. The aim of this thesis is to contribute to a better understanding of some of the features of leveraged products and provide useful insights on how to best use these new instruments

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